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entitled 'Reverse Mortgages: Product Complexity and Consumer Protection 
Issues Underscore Need for Improved Controls over Counseling for 
Borrowers' which was released on June 29, 2009. 

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Report to Congressional Requesters: 

United States Government Accountability Office: 
GAO: 

June 2009: 

Reverse Mortgages: 

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

GAO-09-606: 

GAO Highlights: 

Highlights of GAO-09-606, a report to congressional requesters. 

Why GAO Did This Study: 

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. 

What GAO Found: 

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. 

What GAO Recommends: 

GAO makes recommendations designed to address potentially misleading 
marketing of HECMs and improve HUD’s oversight of HECM counseling 
providers. The federal banking regulators agreed with our 
recommendations. HUD and FTC did not comment on them. 

View [hyperlink, http://www.gao.gov/products/GAO-09-606] or key 
components. For more information, contact Mathew Scirè at (202) 512-
8678 or sciremj@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

The Potential Benefits and Costs of HECMs Can Be Varied and Complex, 
and Concerns Exist That Some Consumers May Not Fully Understand the 
Product: 

Although Various Agencies Have Some Responsibility for Assessing HECM 
Marketing, Some Advertisements Contain Potentially Misleading Claims: 

Development of HECM-Specific, Cross-Selling Regulations Is in 
Preliminary Stage, and States Have Uncovered Some Evidence of 
Inappropriate Cross-Selling: 

HUD's Internal Controls Do Not Provide Reasonable Assurance That 
Counseling Agencies Are Complying with HECM Counseling Requirements: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Copy of a Blank Certificate of HECM Counseling: 

Appendix III: Our Learning Center's Evaluation of Selected Information 
Presented during the Undercover Counseling Sessions: 

Appendix IV: Comments from the Board of Governors of the Federal 
Reserve System: 

Appendix V: Comments from the Federal Deposit Insurance Corporation: 

Appendix VI: Comments from the Office of the Comptroller of the 
Currency: 

Appendix VII: Comments from the Office of Thrift Supervision: 

Appendix VIII: Comments from the Department of Housing and Urban 
Development: 

Appendix IX: GAO Contact and Staff Acknowledgments: 

Table: 

Table 1: Government Agencies Involved with Consumer Protections for 
HECM Borrowers: 

Figures: 

Figure 1: Comparison of 30-Year Forward and Reverse Mortgages: 

Figure 2: Changes in Remaining Home Equity over a 10-Year Period under 
Three Economic Scenarios (Borrower Draws Down Loan According to 
Historical Patterns): 

Figure 3: Example of a Reverse Mortgage Advertisement Containing 
Potentially Misleading Statements: 

Figure 4: Summary of Counselors' Compliance with HUD's HECM Counseling 
Requirements: 

Figure 5: Summary of Information Packages: 

Abbreviations: 

CSBS: Conference of State Bank Supervisors: 

FDIC: Federal Deposit Insurance Corporation: 

FHA: Federal Housing Administration: 

FINRA: Financial Industry Regulatory Authority: 

FTC: Federal Trade Commission: 

FTC Act: Federal Trade Commission Act: 

HECM: Home Equity Conversion Mortgage: 

HERA: Housing and Economic Recovery Act of 2008: 

HOC: Home Ownership Center: 

HUD: Department of Housing and Urban Development: 

NAIC: National Association of Insurance Commissioners: 

NCUA: National Credit Union Association: 

NFCC: National Foundation for Credit Counseling, Inc. 

NRMLA: National Reverse Mortgage Lenders Association: 

MMI: Money Management International, Inc. 

OCC: Office of the Comptroller of the Currency: 

OTS: Office of Thrift Supervision: 

SEC: Securities and Exchange Commission: 

SSA: Social Security Administration: 

SSI: Supplemental Security Income: 

TALC: total annual loan cost: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

June 29, 2009: 

The Honorable Herb Kohl: 
Chairman: 
Special Committee on Aging: 
United States Senate: 

The Honorable Claire C. McCaskill: 
United States Senate: 

A reverse mortgage is a loan that converts the borrower's home equity 
into payments from a lender and, typically, does not require any 
repayments as long as the borrower continues to live in the home. 
Available to homeowners aged 62 and older, these loans have become an 
increasingly popular financial tool for seniors, but concerns have 
emerged about the adequacy of consumer protections for reverse mortgage 
borrowers. The potential for rapid and continued growth of the industry 
has added to these concerns. By 2020, nearly 55 million people in the 
United States will be at least 65 years old, many of whom will own 
their homes. Furthermore, many senior homeowners rely only on Social 
Security payments to meet their financial needs, making reverse 
mortgages a potentially attractive source of additional income. 

According to industry sources, almost all reverse mortgages are 
currently made under the Home Equity Conversion Mortgage (HECM) 
program, which is administered by the Department of Housing and Urban 
Development (HUD). The HECM program began in 1988, when Congress 
authorized HUD to insure reverse mortgages to meet the financial needs 
of elderly homeowners by reducing the effect of economic hardship at a 
time of reduced income for seniors, while protecting reverse mortgage 
lenders and borrowers from financial losses.[Footnote 1] The volume of 
HECMs made annually has grown from 157 loans in fiscal year 1990 to 
more than 112,000 loans in fiscal year 2008. In addition, recent years 
have seen a rapid increase in the number of lenders participating in 
the HECM program, with more than 1,500 lenders originating their first 
HECM in 2008, bringing the total number of HECM lenders to over 2,700. 
[Footnote 2] 

The complicated nature of the product and the concern that older 
consumers can be more vulnerable to unscrupulous sales practices have 
brought reverse mortgages to the attention of consumer advocates, 
regulators, and policymakers. Since the inception of the HECM program, 
Congress has required prospective borrowers to obtain adequate 
counseling by an independent third party so that they could make 
informed decisions about whether to obtain a HECM. Borrowers must 
complete counseling with a HUD-approved housing counseling agency 
before obtaining the loan. Nevertheless, concerns about consumer 
protections persist. For example, some consumer advocates have 
expressed concern about misleading marketing and inappropriate cross- 
selling--the practice of encouraging borrowers to use reverse mortgage 
funds to purchase insurance or other products that may be unsuitable to 
the borrower's financial situation. The Housing and Economic Recovery 
Act of 2008 (HERA) acknowledged some of these concerns by putting in 
place additional consumer protection measures.[Footnote 3] 

In light of concerns about potentially misleading marketing practices 
and the adequacy of relevant consumer protections, as agreed with your 
offices, we examine in this report (1) the potential benefits and costs 
of HECMs to borrowers, (2) federal agency responsibilities for 
protecting consumers from misleading HECM marketing, (3) federal agency 
efforts to protect HECM borrowers from inappropriate cross-selling, and 
(4) HUD's oversight of HECM counseling providers. 

To address these objectives, we spoke with agency, industry, and 
nonprofit officials, including those at HUD; federal and state banking 
regulators; AARP; and the National Reverse Mortgage Lenders Association 
(NRMLA). In addition, to examine the potential benefits and costs of 
HECMs to borrowers, we reviewed HUD's regulations, guidance, and 
consumer materials related to the program. We also spoke with 18 
randomly selected HECM borrowers and constructed scenarios to determine 
how various borrower decisions and economic conditions could affect 
home equity over the long term. To examine federal agency 
responsibilities to protect consumers from misleading HECM marketing, 
we identified authorities, standards, and processes that HUD, the 
Federal Trade Commission (FTC), and four federal banking regulators use 
to identify and address misleading marketing practices. In addition, we 
obtained agency information on complaints related to HECM marketing. We 
also conducted our own review of HECM marketing materials, which 
included a review of the Internet marketing materials for the 12 HECM 
lenders that originated at least 1,000 HECMs in fiscal year 2008, 
mailed materials from 11 of these 12 lenders, as well as DVDs and other 
materials from HECM lenders that advertise on television. We also 
conducted Internet searches for materials with potentially misleading 
statements and collected materials from seven reverse mortgage 
information seminars. We attended seminars in Florida and California-- 
states with among the largest number of HECMs--and seminars in Maryland 
and Michigan, for purposes of geographic diversity. To examine the 
steps federal agencies have taken to protect HECM borrowers from 
inappropriate cross-selling, we reviewed the HERA provisions on cross- 
selling, HUD's actions to implement the provisions, and other HUD and 
federal regulator activities related to these practices. In addition, 
we compiled examples from state insurance regulators of cross-selling 
that violated state insurance laws. To examine HUD's oversight of HECM 
counseling providers, we identified the internal controls that HUD 
currently has in place to ensure compliance with HUD counseling 
requirements and tested the effectiveness of these controls by 
conducting 15 undercover counseling sessions with HUD-approved 
counselors. For each session, we determined whether counselors covered 
the required topics and met other requirements, such as accurately 
recording the length of the counseling session. We interviewed HUD 
field and headquarters staff about the procedures they use to evaluate 
counseling agency performance. Finally, we reviewed and conducted 
limited testing of HUD's controls over the process that HECM providers 
are required to follow for referring potential borrowers to counseling 
agencies. 

We conducted this performance audit from April 2008 through June 2009, 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. Our investigative work was 
performed in accordance with standards prescribed by the Council of the 
Inspectors General on Integrity and Efficiency. Appendix I contains a 
more extensive discussion of our scope and methodology. 

Background: 

A reverse mortgage is a loan against the borrower's home that the 
borrower does not need to repay for as long as the borrower meets 
certain conditions. These conditions, among others, require the 
borrower to live in the home, pay property taxes and homeowners' 
insurance, maintain the property, and retain the title in his or her 
name. [Footnote 4] Reverse mortgages typically are "rising debt, 
falling equity" loans, in which the loan balance increases and the home 
equity decreases over time. As the borrower receives payments from the 
lender, the lender adds the principal and interest to the loan balance, 
reducing the homeowner's equity. This is the opposite of what happens 
in forward mortgages, which are characterized as "falling debt, rising 
equity" loans. With forward mortgages, monthly loan payments made to 
the lender add to the borrower's home equity and decrease the loan 
balance. (See figure 1). 

Figure 1: Comparison of 30-Year Forward and Reverse Mortgages: 

[Refer to PDF for image: two stacked vertical bar graphs] 

Traditional 30-year forward mortgage: 

Age of loan in years: 1; 
Loan Balance (debt): $236,459; 
Home Equity: $69,540.9. 

Age of loan in years: 2; 
Loan Balance (debt): $232,737; 
Home Equity: $79,382.9. 

Age of loan in years: 3; 
Loan Balance (debt): $228,825; 
Home Equity: $89,537.7. 

Age of loan in years: 4; 
Loan Balance (debt): $224,712; 
Home Equity: $100,018. 

Age of loan in years: 5; 
Loan Balance (debt): $220,389; 
Home Equity: $110,835. 

Age of loan in years: 6; 
Loan Balance (debt): $215,845; 
Home Equity: $122,004. 

Age of loan in years: 7; 
Loan Balance (debt): $211,068; 
Home Equity: $133,537. 

Age of loan in years: 8; 
Loan Balance (debt): $206,047; 
Home Equity: $145,451. 

Age of loan in years: 9; 
Loan Balance (debt): $200,769; 
Home Equity: $157,759. 

Age of loan in years: 10; 
Loan Balance (debt): $195,221; 
Home Equity: $170,477. 

Age of loan in years: 11; 
Loan Balance (debt): $189,389; 
Home Equity: $183,623. 

Age of loan in years: 12; 
Loan Balance (debt): $183,259; 
Home Equity: $197,213. 

Age of loan in years: 13; 
Loan Balance (debt): $176,815; 
Home Equity: $211,267. 

Age of loan in years: 14; 
Loan Balance (debt): $170,042; 
Home Equity: $225,802. 

Age of loan in years: 15; 
Loan Balance (debt): $162,922; 
Home Equity: $240,839. 

Age of loan in years: 16; 
Loan Balance (debt): $155,438; 
Home Equity: $256,398. 

Age of loan in years: 17; 
Loan Balance (debt): $147,570; 
Home Equity: $272,502. 

Age of loan in years: 18; 
Loan Balance (debt): $139,301; 
Home Equity: $289,173. 

Age of loan in years: 19; 
Loan Balance (debt): $130,608; 
Home Equity: $306,436. 

Age of loan in years: 20; 
Loan Balance (debt): $121,470; 
Home Equity: $324,314. 

Age of loan in years: 21; 
Loan Balance (debt): $111,865; 
Home Equity: $342,835. 

Age of loan in years: 22; 
Loan Balance (debt): $101,769. 
Home Equity: $362,025. 

Age of loan in years: 23; 
Loan Balance (debt): $91,155; 
Home Equity: $381,914. 

Age of loan in years: 24; 
Loan Balance (debt): $79,999; 
Home Equity: $402,532. 

Age of loan in years: 25; 
Loan Balance (debt): $68,272; 
Home Equity: $423,909. 

Age of loan in years: 26; 
Loan Balance (debt): $55,946; 
Home Equity: $446,079. 

Age of loan in years: 27; 
Loan Balance (debt): $42,988; 
Home Equity: $469,077. 

Age of loan in years: 28; 
Loan Balance (debt): $29,368; 
Home Equity: $492,939. 

Age of loan in years: 29; 
Loan Balance (debt): $15,051; 
Home Equity: $517,702. 

Age of loan in years: 30; 
Loan Balance (debt): 0; 
Home Equity: $543,409. 

Reverse mortgage, over 30 years: 

Age of loan in years: 1; 
Loan Balance (debt): $200,788; 
Home Equity: $83,792. 

Age of loan in years: 2; 
Loan Balance (debt): $208,357; 
Home Equity: $81,915. 

Age of loan in years: 3; 
Loan Balance (debt): $216,194; 
Home Equity: $79,883. 

Age of loan in years: 4; 
Loan Balance (debt): 224,310; 
Home Equity: $77,688. 

Age of loan in years: 5; 
Loan Balance (debt): $232,715; 
Home Equity: $75,324. 

Age of loan in years: 6; 
Loan Balance (debt): $241,419; 
Home Equity: $72,781. 

Age of loan in years: 7; 
Loan Balance (debt): $250,432; 
Home Equity: $70,051. 

Age of loan in years: 8; 
Loan Balance (debt): $259,766; 
Home Equity: $67,127. 

Age of loan in years: 9; 
Loan Balance (debt): $269,432; 
Home Equity: $63,999. 

Age of loan in years: 10; 
Loan Balance (debt): $279,441; 
Home Equity: $60,658. 

Age of loan in years: 11; 
Loan Balance (debt): $289,807; 
Home Equity: $57,094. 

Age of loan in years: 12; 
Loan Balance (debt): $300,542; 
Home Equity: $53,298. 

Age of loan in years: 13; 
Loan Balance (debt): $311,658; 
Home Equity: $49,259. 

Age of loan in years: 14; 
Loan Balance (debt): $323,169; 
Home Equity: $44,965. 

Age of loan in years: 15; 
Loan Balance (debt): $335,090; 
Home Equity: $40,407. 

Age of loan in years: 16; 
Loan Balance (debt): $347,435; 
Home Equity: $35,572. 

Age of loan in years: 17; 
Loan Balance (debt): $36,0219; 
Home Equity: $30,448. 

Age of loan in years: 18; 
Loan Balance (debt): $373,458; 
Home Equity: $25,023. 

Age of loan in years: 19; 
Loan Balance (debt): $387,167; 
Home Equity: $19,283. 

Age of loan in years: 20; 
Loan Balance (debt): $401,365; 
Home Equity: $13,215. 

Age of loan in years: 21; 
Loan Balance (debt): $416,067; 
Home Equity: $6,804. 

Age of loan in years: 22; 
Loan Balance (debt): $431,292; 
Home Equity: $37. 

Age of loan in years: 23"	
Loan Balance (debt): $447,058	
Home Equity: 0 

Age of loan in years: 24; 
Loan Balance (debt): $463,386; 
Home Equity: 0. 

Age of loan in years: 25; 
Loan Balance (debt): $480,294; 
Home Equity: 0. 

Age of loan in years: 26; 
Loan Balance (debt): $497,803; 
Home Equity: 0. 

Age of loan in years: 27; 
Loan Balance (debt): $515,935; 
Home Equity: 0. 

Age of loan in years: 28; 
Loan Balance (debt): $534,712; 
Home Equity: 0. 

Age of loan in years: 29; 
Loan Balance (debt): $55,4157; 
Home Equity: 0. 

Age of loan in years: 30; 
Loan Balance (debt): $574,293; 
Home Equity: 0. 

Source: GAO. 

Note: The data in this figure are based on a starting house value of 
$300,000, with an annual 2 percent home appreciation rate. The interest 
rates are assumed to be fixed at 5 percent for the forward mortgage and 
3 percent for the reverse mortgage. 

[End of figure] 

The Housing and Community Development Act of 1987 (Pub. L. No. 100-242) 
authorized HECMs as a demonstration program in HUD. It was the first 
nationwide reverse mortgage program--available in all 50 states, the 
District of Columbia, and Puerto Rico--that offered the possibility of 
lifetime home occupancy to elderly homeowners. Homeowners aged 62 or 
over with a significant amount of home equity are eligible, as long as 
they live in the house as the principal residence, are not delinquent 
on any federal debt, and live in a single-family residence. If the 
borrower has any remaining balance on a forward mortgage, this 
generally must be paid off first (typically, taken up-front from the 
reverse mortgage). In addition, the condition of the house must meet 
HUD's minimum property standards, but a portion of the HECM can be set 
aside for required repairs. The borrower makes no monthly payments, and 
there are no income or credit requirements to qualify for the mortgage. 

The amount of money that a lender can advance to a HECM borrower (loan 
amount) depends on three main factors. First, the loan amount is based 
on the "maximum claim amount," which is defined as the lesser of the 
appraised value of the house or the Federal Housing Administration 
(FHA) loan limit (the highest mortgage value HUD will insure). In the 
past year, Congress has raised the FHA loan limit for HECMs twice, to 
the current limit of $625,500 nationwide.[Footnote 5] Second, the age 
of the borrower affects the borrower's loan amount--the older the 
borrower, the higher the loan amount. However, if there is more than 
one homeowner, the loan amount is based on the age of the youngest 
borrower. Third, the interest rate also affects the loan amount. 
Typically, the lower the interest rate, the higher the loan amount. 

Since the inception of the HECM program, Congress has mandated that 
borrowers receive information about the financial implications of these 
loans, allowing consumers to make informed decisions. In response, HUD 
developed a counseling program, working with nonprofits, such as the 
AARP Foundation,[Footnote 6] to develop training courses and with a 
network of qualified counselors. Counselors may conduct counseling 
sessions face-to-face or by telephone. HUD has stated that upon the 
completion of HECM counseling, prospective borrowers should be able to 
make an independent, informed decision on whether this product would 
meet their needs. While a lender may order a preliminary title search 
before the prospective borrower receives counseling, the lender may not 
process a loan application until the counseling has been completed. 
Furthermore, HUD requires lenders to provide prospective borrowers with 
a list of HUD-approved counseling agencies from which to choose. 

A number of federal and state agencies have roles in overseeing the 
reverse mortgage market. FHA administers the HECM program and issues 
mortgagee letters to HECM lenders to communicate or clarify HUD 
requirements. HUD's four Home Ownership Centers (HOC) perform a number 
of insurance processing and quality control functions and conduct 
evaluations of HECM counseling providers. In addition, FTC, federal and 
state banking regulators, and state insurance regulators are involved 
with various aspects of consumer protections for HECM borrowers. Table 
1 summarizes the agencies' responsibilities in this area. 

Table 1: Government Agencies Involved with Consumer Protections for 
HECM Borrowers: 

Agency: HUD; 
Key HECM-related responsibilities: 
* Insures HECMs and enforces HECM program requirements; 
* Monitors counseling agencies' compliance with HECM counseling 
requirements. 

Agency: FTC; 
Key HECM-related responsibilities: 
* Enforces the Federal Trade Commission Act (FTC Act)--which prohibits 
unfair or deceptive acts or practices--with nonbank financial 
companies, such as mortgage brokers. 

Agency: Federal banking regulators; 
* Board of Governors of the Federal Reserve System; 
* Office of the Comptroller of the Currency; 
* Federal Deposit Insurance Corporation; 
* Office of Thrift Supervision; 
* National Credit Union Association; 
Key HECM-related responsibilities: 
* For federally regulated lenders, including those that offer HECMs, 
enforce compliance with relevant laws and regulations, such as the FTC 
Act and the Truth in Lending Act, primarily through periodic 
examinations. 

Agency: State banking regulators; 
Key HECM-related responsibilities: 
* For state-regulated lenders, including those that offer HECMs, 
enforce compliance with relevant laws and regulations, primarily 
through periodic examinations. 

Agency: State insurance regulators; 
Key HECM-related responsibilities: 
* Enforce state insurance laws, such as those against the sale of 
unsuitable insurance products. 

Source: GAO. 

[End of table] 

The Potential Benefits and Costs of HECMs Can Be Varied and Complex, 
and Concerns Exist That Some Consumers May Not Fully Understand the 
Product: 

While HECMs can provide senior homeowners with multiple types of 
benefits, including the flexibility to use the money received and 
protection against owing more than the value of the house when the loan 
comes due, HECM costs can be substantial. In addition, how borrowers 
draw down the loan, as well as changes in house values and interest 
rates, can affect the HECM borrowers' remaining home equity. Consumer 
advocates and others have expressed concern that some borrowers may not 
fully understand the complexities of HECM terms and costs, but some 
regulators have taken actions to promote better consumer understanding. 

HECMs Can Provide Multiple Types of Benefits: 

Congress established the HECM program as a way to alleviate economic 
hardship caused by the increasing costs of health, housing, and 
subsistence needs at a time in life when income is reduced. Consistent 
with this goal, HECMs allow senior homeowners to convert their home 
equity into cash advances, while maintaining ownership of their homes. 
HECM borrowers have indicated that the mortgages have helped them to 
meet their financial needs. According to a 2006 AARP survey of reverse 
mortgage borrowers, including HECM borrowers, 83 percent of respondents 
said their loans had completely or mostly met their financials needs, 
and another 12 percent said the loans partly met their needs.[Footnote 
7] In addition, we interviewed 18 randomly selected HECM borrowers, 11 
of whom said their loans completely met their financial needs and 6 of 
whom said the loans partly met their financial needs. 

The money that borrowers receive from a HECM can be used for any 
purpose, and the loan does not have to be repaid until the borrower 
dies, sells the house, moves, or violates other conditions of the 
mortgage. Because there are no restrictions on how the money received 
from a HECM can be used, borrowers can choose to use the funds for 
necessities, such as housing, medication, or groceries, or for other 
purposes, such as vacations. Borrowers surveyed by AARP cited "paying 
off an existing mortgage," "home repairs/improvements," and "improved 
quality of life" as the most common "main uses" of reverse mortgage 
funds. In our interviews with HECM borrowers, borrowers cited 
additional reasons for looking into a reverse mortgage, including 
making insurance payments, providing money to children and 
grandchildren, paying off nonmortgage loans, and supplementing limited 
retirement income. Furthermore, some borrowers also may use HECM money 
to address issues associated with failing health. For example, a 
National Council on Aging report discusses the use of reverse mortgages 
to fund in-home services to allow seniors to age in place[Footnote 8]. 
In addition to unrestricted use of the money, HECM borrowers are not 
required to make monthly interest or principal payments to the lender 
as long as the borrower lives in the house. However, borrowers must 
continue to pay property taxes and homeowners' insurance, and they must 
maintain the condition of the house. 

Borrowers also can choose different ways to receive money from a HECM--
as monthly payments, a line of credit, or a combination of both. 
Monthly payments can be received for a fixed period (term payments) or 
for as long as the borrower has the loan (tenure payments), and lines 
of credit can be accessed at any rate the borrower chooses (including 
receiving all of the money up front). Borrowers who obtained HECMs in 
fiscal year 2008 mostly chose the line-of-credit payment option. 
According to HUD data, 89 percent of these borrowers chose to receive 
their money solely as a line of credit, and an additional 6 percent 
chose to receive a line of credit in combination with term or tenure 
monthly payments. Generally, those choosing a line of credit withdraw 
about 60 percent of their funds at the loan's inception. 

Another benefit of HECMs is the potential growth over time in the 
amount of funds available to the borrower under each of the payment 
plans. For example, for borrowers who choose a line of credit but do 
not draw down all of the funds up front, any remaining line of credit 
grows by the same rate as the interest rate on the mortgage, plus 0.5 
percent. To illustrate this HECM feature, consider a borrower who 
receives a line of credit of $100,000, withdraws $20,000 up front, and 
keeps the remaining $80,000 in the line of credit. If the borrower does 
not draw down any additional funds during the next year, and the 
interest rate plus 0.5 percent mortgage insurance premium were equal to 
3 percent, the borrower's credit line would grow to $82,400 at the end 
of 1 year. 

FHA mortgage insurance benefits borrowers in several ways. First, 
lenders can provide borrowers with higher loan amounts than they could 
without the insurance. Second, the insurance guarantees that HECM 
borrowers will have access to the full amount of promised loan funds, 
regardless of how long the borrower lives in the house, of changes in 
the home value, or of changes in the circumstances of the lender. For 
example, the lender may assign the loan to FHA once the loan balance 
reaches 98 percent of the maximum claim amount, and FHA will continue 
making payments to the borrower if the borrower has remaining funds in 
a line of credit or still is receiving monthly payments. According to 
HUD, program experience thus far suggests that lenders assign to FHA 
about 25 percent of HECMs made in any given year. Similarly, if a 
lender goes out of business, the lender can assign the HECM to FHA, 
protecting the borrower from any risk of losing promised loan funds. 
Finally, FHA insurance protects borrowers from owing more than the 
value of the house when the loan becomes due. When a HECM becomes due, 
the borrower or heir to the borrower can retain ownership of the home 
and repay the loan in full, including all accumulated principal and 
interest charges. However, if the borrower or heir sells the home, he 
or she will not be responsible for any loan amount above the value of 
the house. 

Finally, HERA authorized a "HECM for Purchase" program for seniors who 
want to use a HECM to buy a new home. Unlike a traditional HECM, a HECM 
for purchase is made against the value of the home to be purchased, 
rather than against the value of a home the borrower already owns. 
Before the HECM for purchase program was available, seniors wanting 
both to buy a new home and obtain a HECM would have had to conduct two 
transactions--first to buy the home with a forward mortgage, then to 
obtain a HECM to pay off the balance of that forward mortgage. The HECM 
for purchase program allows a senior to simultaneously buy a new home 
and obtain a HECM in a single transaction with a single set of closing 
costs, thereby reducing the cost to the senior. For example, with the 
HECM for purchase program, a senior who wants to buy a $300,000 home 
could use a HECM to partially finance this purchase. In this example, 
the senior qualifies for an $180,000 HECM on the basis of his age, the 
interest rate, and the value of the home to be purchased--the same 
factors used to determine the amount of a traditional HECM. The senior 
would combine the $180,000 in loan funds with $120,000 of his own--for 
example, from personal savings or money from the sale of his current 
home--to fully purchase the new home. He then would have no monthly 
mortgage payments and would avoid the closing costs of first obtaining 
a forward mortgage. As with a traditional HECM, the loan would become 
due when the senior died, sold the house, or permanently moved out of 
the house. 

HECM Costs Can Be Substantial: 

While HECMs can provide many benefits, the up-front insurance premiums 
and origination fees of HECMs can be substantial. HUD permits borrowers 
to finance these costs in the mortgage. 

* Mortgage insurance premium: FHA charges insurance premiums to cover 
the potential cost of paying insurance claims. FHA assesses a one-time, 
nonrefundable initial mortgage insurance premium equal to 2 percent of 
the maximum claim amount. The maximum claim amount is always higher 
than the amount a borrower can receive in HECM payments from the 
lender. However, because the HECM loan balance (with accumulated 
interest and fees) will exceed the amount a borrower receives in 
payments and potentially reach the maximum claim amount, FHA charges 
the mortgage insurance premium on the basis of the maximum claim 
amount. 

* Origination fee: At the time of closing, lenders can charge an 
origination fee equal to the greater of $2,500 or 2 percent of the 
maximum claim amount, up to $200,000 plus 1 percent of any portion of 
the claim amount greater than $200,000, with the total origination fee 
not to exceed $6,000.[Footnote 9] 

To illustrate these up-front costs, consider a HECM borrower with a 
home value of $300,000. In this case, the borrower would pay (either 
out of pocket or financed through the mortgage) total up-front 
insurance and origination costs of $11,000 ($6,000 for the mortgage 
insurance premium and $5,000 for the origination fee). HECMs also have 
other up-front closing costs, such as appraisal and title search fees. 

In addition to the up-front premiums and fees, lenders add monthly 
servicing fees, interest charges, and monthly premiums to HECM 
balances. 

* Servicing fee: A lender's monthly servicing fee may not exceed $30 
per month for fixed-rate or annually adjustable loans, and $35 for 
monthly adjustable loans. To finance this fee with the loan, FHA 
requires lenders to determine a prescribed dollar amount and deduct 
that amount, called the servicing fee set-aside, from the amount of 
loan funds available to the borrower. Each month, the lender deducts 
the servicing fee from this set-aside and adds it to the borrower's 
loan balance. 

* Interest charges: Monthly interest charges are also added to the 
borrower's loan balance. Most HECMs have adjustable interest rates. 

* Monthly mortgage insurance premium: Finally, in addition to the up- 
front mortgage insurance premium that we have previously described, FHA 
charges a monthly mortgage insurance premium based on the loan balance. 
FHA has set the monthly premium at an annual rate of 0.5 percent, and 
lenders also add this premium to the borrower's loan balance each 
month. 

Because HECM borrowers do not make monthly payments to the lender, 
borrowers are responsible for the total amount of servicing fees, 
interest charges, and monthly mortgage insurance premiums accrued over 
the life of the loan, as well as any financed origination fees and up- 
front insurance premiums, when the loan becomes due. Therefore, the 
longer the borrower has the loan, the longer the borrower benefits from 
access to home equity without experiencing any of the costs. 

Multiple Factors Can Affect the Borrower's Remaining Home Equity: 

Multiple factors, including borrower decisions, interest rates, and 
home values, can affect the amount of home equity remaining--that is, 
the value of the home minus any debt against it--when a HECM comes due. 
The contingent nature of remaining equity could have implications for 
borrowers who may hope to have equity left over--whether for themselves 
or their heirs--after the HECM is repaid. According to AARP Foundation 
consumer education materials, prospective HECM borrowers should 
consider the amount of home equity that might be left at the end of the 
loan. Most of the borrowers with whom we spoke said that having 
remaining equity was very or somewhat important to them, citing various 
reasons, such as wanting to leave remaining equity to children or 
grandchildren or to have money left over to fund their retirement. 

As we have previously noted, the "rising debt, falling equity" nature 
of reverse mortgages means that over time, the amount of equity the 
borrower has in the home decreases as the loan balance increases 
(unless the home appreciates at more than a moderate rate). Several 
factors affect the rate at which equity changes and, therefore, the 
amount of equity the borrower will have to keep or pass on to heirs 
when the loan becomes due: 

* Borrower decisions: The amount of the available funds borrowed will 
affect the amount of the remaining home equity. The more the borrower 
draws from the loan, the less remaining home equity the borrower will 
have. 

* Interest rates: As we have previously discussed, because most HECMs 
have interest rates that vary, economic factors that determine interest 
rates also will affect the remaining home equity over the long term. 

* Home values: The amount of home equity remaining for the borrower or 
heirs will be the value of the home, minus the amount owed on the HECM. 
Thus, whether and how much the value of the home appreciates also will 
affect the amount of remaining home equity. 

Figure 2 illustrates how interest rates and home values can affect 
remaining home equity over a 10-year period. The figure reflects three 
different interest and house appreciation rate assumptions for a 
borrower who draws down the HECM funds in a manner consistent with 
historical average borrower profiles:[Footnote 10] 

1. Economic forecasts: Interest and appreciation rates follow economic 
forecasts for 2008 through 2017.[Footnote 11] 

2. Constant rates: Interest rates remain constant at the starting rate, 
and houses appreciate at a constant 4 percent per year. 

3. Historical patterns: Interest and house appreciation rates repeat 
the pattern seen from 1998 through 2007.[Footnote 12] 

As shown in figure 2, if interest and appreciation rates were to vary 
monthly on the basis of economic forecasts for 2008 through 2017, the 
borrower would have about $11,750 of remaining home equity--after 
repaying the HECM--at the end of 10 years. However, if interest rates 
were to stay constant at the initial rate, and house values were to 
appreciate by 4 percent annually, the borrower would have more than 
$102,000 in remaining home equity. Finally, if interest and 
appreciation rates were to repeat the pattern seen from 1998 through 
2007, the borrower would have the most remaining equity of the three 
scenarios--that is, more than $191,000. 

Figure 2: Changes in Remaining Home Equity over a 10-Year Period under 
Three Economic Scenarios (Borrower Draws Down Loan According to 
Historical Patterns): 

[Refer to PDF for image: multiple line graph] 

Year-end: 0; 
Historic Interest and appreciation rate: $128,000 net equity; 
Constant Interest and appreciation rate: $128,000 net equity; 
Variable Interest and appreciation rate, based on economic forecasts: 
$128,000 net equity. 

Year-end: 1; 
Historic Interest and appreciation rate: $132,927 net equity; 
Constant Interest and appreciation rate: $132,212 net equity; 
Variable Interest and appreciation rate, based on economic forecasts: 
$108,576 net equity. 

Year-end: 2; 
Historic Interest and appreciation rate: $131,939 net equity; 
Constant Interest and appreciation rate: $126,058 net equity; 
Variable Interest and appreciation rate, based on economic forecasts: 
$89.211 net equity; 

Year-end: 3; 
Historic Interest and appreciation rate: $135,702 net equity; 
Constant Interest and appreciation rate: $122,436 net equity; 
Variable Interest and appreciation rate, based on economic forecasts: 
$73,113 net equity. 

Year-end: 4; 
Historic Interest and appreciation rate: $142,366 net equity; 
Constant Interest and appreciation rate: $119,676 net equity; 
Variable Interest and appreciation rate, based on economic forecasts: 
$66,052 net equity. 

Year-end: 5; 
Historic Interest and appreciation rate: $154,446 net equity; 
Constant Interest and appreciation rate: $117,814 net equity; 
Variable Interest and appreciation rate, based on economic forecasts: 
$58,292 net equity. 

Year-end: 6; 
Historic Interest and appreciation rate: $169,111 net equity; 
Constant Interest and appreciation rate: $116,532 net equity; 
Variable Interest and appreciation rate, based on economic forecasts: 
$53,158 net equity. 

Year-end: 7; 
Historic Interest and appreciation rate: $189,914 net equity; 
Constant Interest and appreciation rate: $114,253 net equity; 
Variable Interest and appreciation rate, based on economic forecasts: 
$44.434 net equity. 

Year-end: 8; 
Historic Interest and appreciation rate: $211,686 net equity; 
Constant Interest and appreciation rate: $111,107 net equity; 
Variable Interest and appreciation rate, based on economic forecasts: 
$36,133 net equity. 

Year-end: 9; 
Historic Interest and appreciation rate: $211,470 net equity; 
Constant Interest and appreciation rate: $107.233 net equity; 
Variable Interest and appreciation rate, based on economic forecasts: 
$23,083 net equity. 

Year-end: 10; 
Historic Interest and appreciation rate: $191,625 net equity; 
Constant Interest and appreciation rate: $102,773 net equity; 
Variable Interest and appreciation rate, based on economic forecasts: 
$11,748 net equity. 

Source: GAO. 

[End of figure] 

Concerns Exist That Some Consumers May Not Fully Understand HECM 
Complexities: 

HUD and industry officials indicated that the complex nature of HECMs 
may make them difficult for some borrowers to understand. Specifically, 
officials expressed concern about some borrowers' understanding of the 
nature and costs of the loan. 

* HECM is a loan product: AARP officials told us that some borrowers 
were not aware that they were borrowing money, rather than drawing 
directly from the equity in their homes. Similarly, the president of 
NRMLA provided an example of a consumer who did not understand why she 
owed more than the amount she borrowed, not realizing that her loan was 
accumulating interest and fees. In our interviews with borrowers, 2 of 
the 18 borrowers with whom we spoke did not understand that the money 
they were drawing was accumulating interest, indicating that they may 
not have understood that their HECM was a loan. 

* Costs of HECMs: Some borrowers may not readily understand some of the 
costs of a reverse mortgage. For example, 1 borrower we interviewed 
said he was surprised by the $35 monthly servicing charge, and another 
borrower said she had not known how high the fees would be and was 
surprised by the amount of servicing fees the lender charged in a year. 
Similarly, some borrowers may understand the concept of interest 
charges, but may not understand that their HECM interest rate is 
variable and can increase over time. For example, several borrowers 
with whom we spoke did not know the type of interest rate they had, and 
1 borrower said he was surprised that his interest rate varied. 

* Effect of a HECM on remaining home equity: AARP representatives told 
us that some seniors may not understand that reverse mortgages result 
in "rising debt and falling equity," which differs from the "falling 
debt, rising equity" result of a forward mortgage. Furthermore, our 
interviews with HECM borrowers illustrate how some may not be aware of 
all of the factors that can affect how much home equity they will have 
remaining after the reverse mortgage is repaid. For example, when we 
asked if changes in house values could affect their remaining home 
equity, several borrowers responded that they could not. 

Regulators and others have taken some actions to promote better 
consumer understanding of the costs and terms of HECMs. For example, as 
we discuss later in this report, HUD has taken some steps to improve 
the types and quality of information provided to prospective HECM 
borrowers during the required HECM counseling sessions. In addition, 
various entities, including FTC, the Financial Industry Regulatory 
Authority (FINRA), state agencies, and consumer groups have issued fact 
sheets and tips for consumers interested in reverse mortgages. For 
example, FTC has issued a fact sheet on reverse mortgages to help 
borrowers understand the product, and the Federal Deposit Insurance 
Corporation (FDIC) has included information on reverse mortgages in its 
consumer financial education program. In addition, Massachusetts has a 
Web site on "What Borrowers Need to Know" about reverse mortgages. 

Although Various Agencies Have Some Responsibility for Assessing HECM 
Marketing, Some Advertisements Contain Potentially Misleading Claims: 

Various state and federal agencies have some responsibility for 
assessing marketing for mortgage products, including FTC, federal and 
state banking regulators, and HUD. Agency officials indicated that 
while complaints are one factor that could trigger more extensive 
assessments of marketing materials, they have received few complaints 
about reverse mortgage marketing. Our review of selected advertisements 
found examples of marketing claims that were potentially misleading 
because they were inaccurate, incomplete, or used questionable sales 
tactics. Federal agency officials agreed that some of these 
advertisements raised concerns. 

FTC, Banking Regulators, and HUD Share Responsibility for Assessing 
Marketing and Enforcing Standards: 

Several federal and state agencies have a role in assessing and 
enforcing standards for the marketing of mortgage products. These 
agencies have responsibility over different segments of the mortgage 
market and may focus on different aspects of marketing claims. However, 
the federal and state agencies involved with assessing reverse mortgage 
marketing have not specifically focused on this product. 

FTC: 

FTC has responsibility for protecting consumers against unfair or 
deceptive practices originating from nonbank financial companies, such 
as mortgage brokers. Specifically, FTC enforces section 5 the FTC Act, 
which broadly prohibits unfair or deceptive acts or practices in 
commerce. Section 5(n) of the FTC Act defines "unfair" to mean 
practices that cause or are likely to cause substantial injury that 
cannot be reasonably avoided by consumers and is not outweighed by 
countervailing benefits to consumers or to competition. FTC has defined 
"deceptive" to mean any material representation or omission of 
information, or practice that is likely to mislead consumers who are 
acting reasonably under the circumstances. Misleading information is 
"material" to consumers if it is likely to affect the consumer's 
decision to purchase a product or service. For some products, including 
forward mortgage products, FTC officials stated that they have 
conducted systematic searches of all forms of media, including 
Internet, print, and television advertisements for potential violations 
of the FTC Act. Violators of the FTC Act could be subject to actions 
ranging from warning letters to cease-and-desist orders. For example, 
in 2007, FTC sent warning letters to 200 forward mortgage lenders 
identifying potentially deceptive advertisements that the lenders had 
run and advising the lenders to review their marketing practices to 
ensure they complied with the law. 

FTC officials said they have not systematically searched for 
potentially misleading reverse mortgage marketing, and have not brought 
any law enforcement actions related to reverse mortgage marketing. 
However, FTC officials did note that they are maintaining an awareness 
of the potential risks associated with reverse mortgage marketing. For 
example, FTC staff said that they monitor their consumer complaint 
database for complaints about reverse mortgage marketing. In addition, 
FTC formed a task force of state and federal regulators and law 
enforcement agencies, in part to learn about complaints related to 
reverse mortgages that may not be captured by FTC's database. The FTC 
officials said the task force will allow them to take early action if 
problems related to reverse mortgages begin to surface. In addition, 
FTC has developed educational materials for reverse mortgage 
counselors, which include information on identifying deceptive claims 
related to reverse mortgages. The FTC officials noted that because 
counselors are informed about the product, they may be well-positioned 
to help consumers identify questionable marketing claims and practices. 
Furthermore, FTC officials told us that they plan to speak about 
marketing issues at an upcoming reverse mortgage industry conference. 

Federal Banking Regulators: 

HECM lenders that are regulated by one of the federal banking 
regulators--the Board of Governors of the Federal Reserve System 
(Federal Reserve), Office of the Comptroller of the Currency (OCC), 
Office of Thrift Supervision (OTS), FDIC, or the National Credit Union 
Association (NCUA)--are subject to compliance examinations that could 
include a review of HECM marketing materials.[Footnote 13] Each of the 
banking regulators with whom we spoke said that reverse mortgages have 
been included in compliance examinations of lenders, but because few of 
their regulated lenders offer reverse mortgages, they have not 
conducted many examinations that have included these loans. In 
addition, among lenders who offer the product, reverse mortgages do not 
make up a significant portion of bank activity--by one estimate, 1 
percent of mortgage portfolios. Federal regulators said when compliance 
examinations are conducted, they could include an assessment of whether 
the materials comply with FTC Act standards. In addition, OTS prohibits 
the thrifts that it regulates from using marketing materials that 
contain inaccurate information or misrepresents the services offered-- 
a standard that an OTS official described as being broader than that 
set by the FTC Act.[Footnote 14] Officials at each of these federal 
banking regulators noted that they are not aware of any violations 
related to reverse mortgage marketing. As FTC has been doing, federal 
banking regulators are maintaining an awareness of the potential risks 
associated with reverse mortgages, which could include those associated 
with reverse mortgage marketing. Specifically, the Consumer Compliance 
Task Force of the Federal Financial Institutions Examination Council-- 
the interagency body that includes the federal banking regulators and 
develops guidance for federal bank examiners--recently formed a working 
group on reverse mortgages. 

State Banking Regulators: 

Some HECM lenders are regulated at the state level, with HECM marketing 
materials subject to state compliance examinations. We obtained 
information on state agency efforts to review reverse mortgage 
marketing materials through the Conference of State Bank Supervisors 
(CSBS), which sent a set of standardized questions we developed to all 
50 states and the District of Columbia. Of the 35 state banking 
regulators that responded to the questions, 22 said they routinely 
examine marketing materials as part of compliance examinations. 
However, only 1 state banking regulator--the Idaho Department of 
Finance--reported taking action against a lender because of reverse 
mortgage marketing. In addition, we learned that the Massachusetts 
Division of Banks issued a HECM lender a cease-and-desist order for 
marketing HECMs as "government benefits." 

State banking regulators also are maintaining an awareness of the 
potential risks associated with reverse mortgages. For example, these 
regulators also formed a task force to examine consumer protections for 
reverse mortgages, including those related to reverse mortgage 
marketing. In addition, CSBS and the American Association of 
Residential Mortgage Regulators recently developed reverse mortgage 
examination guidelines for state regulators conducting reverse mortgage 
compliance examinations.[Footnote 15] These guidelines contain items 
that state regulators could review, including whether the institution 
uses any form of solicitation that appears to be generated by the 
government or can be interpreted to be misleading to the consumer. 

HUD: 

HUD also exercises limited regulatory authority over the marketing 
activity of HECM lenders to ensure that lenders' advertisements do not 
imply endorsement by HUD or FHA. Actions that HUD could take range from 
asking for the removal or clarification of a marketing claim to a 
referral to the Mortgagee Review Board.[Footnote 16] HUD officials 
cited one instance in which they referred a lender to the board for 
misrepresenting the HECM as a "government rescue loan." HUD may also 
make a referral to the Department of Justice, which has jurisdiction 
over criminal prosecution.[Footnote 17] 

Of the federal regulators, HUD is the only agency that has taken action 
against an entity as a result of misleading reverse mortgage marketing. 
However, HUD officials said they do not actively monitor HECM 
marketing, and do not review HECM marketing materials as part of 
routine assessments of HECM lenders. 

Agencies Have Received Few Complaints about HECM Marketing: 

Some agencies with whom we spoke indicated that while complaints could 
trigger more extensive assessments of marketing material, they have 
received few, if any, complaints about reverse mortgage marketing. For 
example, FTC officials said that they have not conducted systematic 
searches for misleading reverse mortgage advertisements as they have 
for products about which they have received many complaints. In 
addition, an FDIC official explained that consumer complaints related 
to a lenders' marketing are one of several factors that could cause 
compliance examiners to review marketing materials. Similarly, OTS 
officials said a consumer complaint could trigger an examination of a 
reverse mortgage lender. However, FDIC and OTS officials told us that 
they have received few complaints related to reverse mortgage 
marketing. 

Consistent with these examples, FTC, the Federal Reserve, OCC, OTS, 
FDIC, and HUD all reported receiving few HECM marketing complaints from 
calendar year 2005 through 2008. FTC officials said they received 50 
complaints related to reverse mortgage marketing in this period, out of 
more than 4 million complaints in their database. Of these 50 
complaints, 8 involved a reverse mortgage lender implying an 
affiliation with a government agency; 9 involved other questionable 
marketing tactics, such as a mailing appearing to be from a personal 
friend; and the others were not directly related to inaccurate claims 
within the marketing materials. OTS officials reported 1 HECM marketing 
complaint over this period, and officials at the Federal Reserve and 
FDIC did not report any complaints related to HECM marketing in this 
period. In addition, OCC officials said a review of reverse mortgage 
complaints in this period did not reveal any concerns with marketing. 
Similarly, among the 123 HECM complaints that HUD received from 
calendar year 2005 through 2008, only a few related to HECM marketing. 
In addition, representatives of state banking regulators told us that 
they have not received many complaints related to reverse mortgage 
marketing. However, while the low volume of complaints could indicate 
few problems with reverse mortgage marketing, FTC officials noted that 
it also could be a result of consumers not being aware that they have 
been deceived, consumers not knowing to whom to complain, or elderly 
consumers being less likely to complain. 

Extent of Misleading HECM Marketing Is Unknown, but Selected Materials 
Contained Some Potentially Misleading Claims: 

While the extent of misleading HECM marketing is unknown, our limited 
review of marketing materials found some examples of claims that were 
potentially misleading because they were inaccurate, incomplete, or 
employed questionable sales tactics. We reviewed Internet marketing 
material from the 12 HECM lenders that originated at least 1,000 loans 
in fiscal year 2008, and reviewed mailed material from 11 of these 12 
lenders.[Footnote 18] In addition, we reviewed mailed, Internet, 
information seminar, and DVD materials from other entities that 
advertised HECMs, for certain potentially misleading claims (discussed 
in the following paragraphs). We found few such claims among the 
materials from the top 12 HECM lenders, and some examples in the 
materials from the other entities.[Footnote 19] 

Some of the potentially misleading marketing claims we found raised 
concern among officials at FTC, HUD, and the federal banking 
regulators. Among the materials we reviewed, we found 26 different 
entities that made potentially misleading claims in their HECM 
marketing materials.[Footnote 20] This group includes entities 
regulated by each of the federal banking regulators with whom we spoke, 
as well as FTC and state regulators; it also includes both members and 
nonmembers of NRMLA. NRMLA members are expected to adhere to the 
association's Code of Ethics, which contains specific rules on ethical 
advertising.[Footnote 21] We selected seven advertisements that 
represented these claims and submitted them to FTC, HUD, the Federal 
Reserve, OCC, FDIC, and OTS for review. We asked officials at each of 
these agencies for their views on these claims and whether they would 
take any action if such advertisements were the subject of a complaint 
or surfaced as part of an examination. In general, the officials with 
whom we spoke agreed that the claims in six of the seven advertisements 
raised some degree of concern and might prompt further investigation. 
[Footnote 22] In commenting on the advertisements, the officials 
indicated that the claims ranged from being confusing to false. Several 
of the officials noted that they would need to consider the fuller 
context of the advertisement to determine if the claims were misleading 
and the level of action they would take if these six advertisements 
were the subject of complaints or compliance examinations. For example, 
an official at FTC said that if its staff were to follow typical 
investigative procedures, they would request more information from the 
advertisers, such as data on the number of consumers who responded to 
the advertisement. Similarly, officials at OTS noted that an assessment 
of consumer reactions to the advertisements might be needed to 
determine if the advertisements violated the FTC Act. An FTC official 
also said that the counseling requirement for HECMs would factor into 
their assessment of HECM marketing. He said that the counseling 
requirement would not, as a matter of law, prevent FTC from taking law 
enforcement action against a HECM lender for deceptive marketing. 
However, FTC would consider the likelihood that counseling would 
mitigate the effect of the potentially misleading information. In 
addition to the regulators, we spoke with the president of NRMLA to 
obtain his views on these seven advertisements. He generally agreed 
with the regulators' assessment that these claims raised concerns. 

The six potentially misleading claims that we identified and agency 
officials generally agreed raised concerns were as follows:[Footnote 
23] 

* "Never owe more than the value of your home": The claim is 
potentially misleading because a borrower or heirs of a borrower would 
owe the full loan balance--even if it were greater than the value of 
the house--if the borrower or heirs chose to keep the house when the 
loan became due. This claim was made by HUD itself in its instructions 
to approved HECM lenders; however, in December 2008, HUD issued a 
mortgagee letter to HECM lenders explaining the inaccuracy of this 
claim. This was the most common of the potentially misleading 
statements we found in the marketing materials we reviewed. Of the 
potentially misleading statements found among the top 12 HECM lenders, 
variations of this statement were the most prevalent. 

* Implications that the reverse mortgage is a "government benefit" or 
otherwise not a loan: While HECMs are government-insured, the product 
is a loan that borrowers or their heirs must repay, not a benefit. 
Examples of this type of claim include the following: "You may be 
qualified for this government-sponsored benefit program" and "Access 
the equity in your home without having to sell, move, or take out a 
loan." An FDIC official noted that consumers might be confused about 
the reverse mortgage being a loan because there are no monthly 
payments, and this claim plays on this confusion. 

* "Lifetime income" or "Can't outlive loan": Although borrowers can 
choose to receive HECM funds as monthly tenure payments, even under 
this option, payments will not continue once the loan comes due (e.g., 
when the borrower moves out of the house or violates other conditions 
of the mortgage). HUD officials noted that this claim could be 
particularly harmful when paired with the claim that the reverse 
mortgage is a government benefit. In addition, claims that a HECM 
borrower cannot outlive the loan are inaccurate because a line of 
credit can be exhausted during the borrower's lifetime, and term 
monthly payments do not continue once the specified term has ended. 

* "Never lose your home": This claim is potentially misleading because 
a lender could foreclose on a HECM borrower's home if the borrower did 
not pay property taxes and hazard insurance or did not maintain the 
house. HUD officials told us that they were aware of cases in which 
borrowers obtained a reverse mortgage without understanding these 
requirements and did not have the means to meet these obligations. 

* Misrepresenting government affiliation: Figure 3 illustrates an 
example of this type of claim, including the use of government symbols 
or logos and claims implying that the lender is a government agency. 
HUD officials said that among the advertisements we asked them to 
review, this would be the only one they would refer to the Mortgagee 
Review Board. Officials at FDIC and OTS noted that in 2007, the federal 
banking regulators jointly issued an alert to warn consumers about 
similar advertisements that suggested that consumers could receive cash 
grants from a "Community Reinvestment Act Program" endorsed by the 
federal banking regulators. In addition, as we have previously noted, 
FTC has received consumer complaints about advertisements for reverse 
mortgages that appear to be from a government agency. 

* Claims of time and geographic limits: These claims falsely imply that 
HECM loans are limited to a certain geographic area, or that the 
consumer must respond within a certain time to qualify for the loan. 
Examples include "must call within 72 hours" and "deadline extended," 
as well as the claim that a consumer's residence is "located in a 
Federal Housing Authority qualifying area." An OCC official said that 
he would consider these to be high-pressure tactics against which he 
would caution banks, even if they do not rise to the level of unfair or 
deceptive practices. 

Figure 3: Example of a Reverse Mortgage Advertisement Containing 
Potentially Misleading Statements: 

[Refer to PDF for image: illustration] 

Portion of advertisement: Header: Government Lending Division: 
Form 11741-A Official Notice; 
Potentially misleading information: Use of government symbol and 
"official notice." 

Portion of advertisement: Body text: Due to the current market 
conditions the U.S. Congress has introduced the Economic Stimulus Act. 
On February 13, 2008 this bill was passed into law by President George 
W. Bush; 
Potentially misleading information: Use of government terms and 
language. 

Portion of advertisement: Body text: Our records indicate your 
residence as being located in a Federal Housing Authority qualifying 
area. Because you are over the age of 62, you are eligible for a Home 
Equity Conversion Reverse Mortgage (HECM) through the U.S. Department 
of Housing and Urban Development; 
Potentially misleading information: Implication of geographic limit; 
misuse of FHA name. 

Portion of advertisement: Body text: This program enables you to: 
* Never make another mortgage payment; 
* receive cash in a lump sum or monthly for life; 
* Own and live in your house for the rest of your life; 
Potentially misleading information: Claim of cash for life. 

Portion of advertisement: Body text: Call Immediately; 
Potentially misleading information: Implication of time limit. 

Source: GAO. 

Note: We removed those parts of the advertisement that would have 
identified the name of the lender. 

[End of figure] 

As we discuss in this report, federal agencies have mechanisms to 
identify and address specific cases of misleading marketing. They also 
have various means, such as conferences and educational materials, for 
communicating more generally with mortgage industry participants and 
the public about consumer protection issues. However, our research 
showed that potentially misleading claims exist in the marketplace, 
which suggests that some HECM providers may not be sufficiently 
considering federal marketing standards in designing their marketing 
materials. We referred the claims we identified to FTC or the 
appropriate federal banking regulator for further review. 

Development of HECM-Specific, Cross-Selling Regulations Is in 
Preliminary Stage, and States Have Uncovered Some Evidence of 
Inappropriate Cross-Selling: 

Concerns exist that reverse mortgage borrowers could be vulnerable to 
inappropriate cross-selling, a practice involving the sale of financial 
or insurance products that are unsuitable for the borrower's financial 
situation using the borrower's reverse mortgage funds. While the 
federal role in addressing this practice has been limited, recent 
legislation includes provisions to restrict inappropriate cross- 
selling in conjunction with HEMCs, and HUD is in the early stages of 
developing regulations to implement these provisions. Although the full 
extent of inappropriate cross-selling is unknown, state regulators have 
identified some instances of this practice in enforcing insurance laws. 

Borrowers May Be Vulnerable to the Sale of Unsuitable Products, Which 
Could Have Adverse Financial Consequences: 

Because reverse mortgages allow borrowers access to a large amount of 
money at once, consumer advocates have expressed concern that reverse 
mortgage borrowers may be vulnerable to the sale of financial and 
insurance products that may be unsuitable for some borrowers. According 
to an AARP survey of reverse mortgage borrowers, 4 percent of 
respondents said they used a reverse mortgage to make investments or 
purchase an annuity or long-term care insurance.[Footnote 24] Some 
consumer advocates, including representatives of AARP and the National 
Association of Consumer Advocates, have expressed concern that these 
products are sometimes sold inappropriately to reverse mortgage 
borrowers. 

In particular, consumer advocates worry that reverse mortgage borrowers 
could be sold some annuity products that may be inappropriate to the 
borrower's circumstances. For example, there is concern that elderly 
reverse mortgage borrowers may be sold deferred annuities, where 
payments may not begin for many years and high fees may be charged for 
early access to the money. Inappropriate cross-selling could take 
different forms. For example, an individual who has financial incentive 
to sell an elderly client a reverse mortgage as well as another 
product, such as a deferred annuity, could sell both products to a 
senior without informing the client of the costs and potential 
implications. Multiple parties, such as HECM originators and insurance 
agents, also could work together for their financial gain. For example, 
an insurance agent could compensate a HECM originator for referring 
HECM borrowers to him, even if using the HECM money for an insurance 
product is not in the borrower's best interest. 

While certain annuity products may be suitable for some HECM borrowers, 
such as those who want to receive payments for life regardless of where 
they live, HUD has noted that HECM borrowers should be fully informed 
of the advantages and disadvantages of using HECM funds to purchase 
these products. HECM counselors are instructed to inform prospective 
borrowers who are also interested in purchasing annuities that HECMs 
also offer monthly payment options, and while these monthly payments 
only last for a specified time or as long as the borrower lives in the 
house, they may be more suitable to the HECM borrower's needs. 

Federal Role in Regulating Cross-Selling Has Been Limited, but 
Regulations to Be Developed Would Create HECM-Specific Federal 
Protections: 

Because cross-selling typically involves the sale of insurance products 
generally regulated at the state level, the role of federal agencies in 
addressing the issue of cross-selling in conjunction with HECMs has 
been limited and largely has been focused on consumer education and 
disclosures.[Footnote 25] For example, federal agencies have had some 
role in informing HECM borrowers about the risks and costs of 
purchasing other financial products using HECM funds. As we discuss 
later in this report, HUD's HECM counseling protocol requires the 
provision of certain consumer education materials to counselees 
interested in purchasing an annuity with their HECM funds. 
Additionally, pursuant to Truth in Lending Act provisions, the Federal 
Reserve developed a disclosure, known as the total annual loan cost 
(TALC) to illustrate the short-and long-term costs of reverse 
mortgages. Lenders must provide reverse mortgage borrowers with this 
disclosure, and if the lender is aware that the consumer is purchasing 
an annuity with reverse mortgage funds, these costs must be accounted 
for in the TALC as part of the total mortgage costs.[Footnote 26] 

In addition, the Securities and Exchange Commission (SEC) is the 
federal regulator for variable annuity products--annuities that are 
tied to the stock market or other investments--and so has 
responsibility for ensuring the appropriate sale of these products. In 
May 2006, the three following entities began an initiative to protect 
seniors from the sale of unsuitable securities: SEC; FINRA, which is a 
nongovernmental regulator for securities firms; and the North American 
Securities Administrators Association. As part of this effort, SEC and 
other regulators conducted a review of 110 information seminars, many 
of which were targeted to seniors, where attendees were offered a free 
meal. These officials found that products sold at these seminars 
included annuities and reverse mortgages, and, in some instances, those 
holding the seminars recommended products that did not appear to be 
suitable for the consumers.[Footnote 27] In addition, in September 
2007, SEC approved a FINRA rule, which includes suitability standards 
for deferred variable annuities. As with the state suitability laws we 
discuss in the following text, these standards may limit the sale of 
unsuitable deferred variable annuities to seniors, whether purchased 
with HECM funds or not. 

As we have previously noted, Congress passed HERA in 2008, which 
includes provisions intended to curb the sale of unsuitable financial 
products to consumers using HECM funds. According to the provisions of 
the act, a borrower cannot be required by the lender or any other party 
to purchase an insurance, annuity, or similar product as a condition of 
obtaining a HECM. In addition, the lender either must not be associated 
with any other financial or insurance product or must maintain 
firewalls and other safeguards to ensure that its employees originating 
the HECMs do not also sell other financial or insurance products. 
Finally, HUD must conduct a study to determine appropriate consumer 
protections and underwriting standards to ensure that the purchase of 
other financial products is appropriate for the consumer. 

HUD has responsibility for enforcing the cross-selling provisions in 
HERA, but the department is in the preliminary stages of developing 
regulations to implement them. According to HUD officials, HUD is 
drafting a Federal Register notification to solicit feedback on this 
issue. HUD officials noted that the draft notification poses a number 
of questions concerning several issues, including HUD's ability to 
monitor and enforce the provision; the usefulness of disclosures, 
education, and counseling in preventing inappropriate cross-selling; 
what would constitute "appropriate" firewalls; and what types of 
financial products should be covered. To further inform development of 
the new regulations, HUD also met with HECM lenders, some of which 
already have cross-selling policies. For example, one large HECM lender 
requires that loan officers follow up with HECM borrowers before and 
after closing to confirm that the borrower has not been sold any 
insurance products. Meanwhile, HUD has issued a mortgagee letter 
instructing HECM lenders that until HUD issues more definitive 
guidance, lenders must not condition a HECM on the purchase of any 
other financial or insurance product, and should strive to establish 
firewalls and other safeguards to ensure there is no undue pressure or 
appearance of pressure for a HECM borrower to purchase another product. 

While HUD is considering regulations to implement the HERA cross- 
selling provisions, the reverse mortgage industry is also discussing 
the implications of these provisions. NRMLA representatives have noted 
that while HERA could prevent inappropriate cross-selling, it also 
could prevent seniors from purchasing beneficial products. In 
particular, the president of NRMLA noted that although some seniors who 
obtain reverse mortgages do so to cover everyday living expenses, 
others are financially sophisticated individuals who may desire to use 
their reverse mortgages as part of long-term financial and insurance 
strategies. He said that for the latter group of borrowers, purchasing 
other products in conjunction with a reverse mortgage may be 
beneficial. For example, some insurance products may be suitable if 
they still allow seniors some access to the funds when needed. NRMLA 
has submitted its legislative interpretation to HUD. According to the 
NRMLA General Counsel, this interpretation allows companies to sell 
multiple products to reverse mortgage borrowers, as long as (1) the 
company has separate sales forces for reverse mortgages and other 
products, and there is no compensation for referrals between the sales 
forces; or (2) the reverse mortgage transaction is separate from the 
sale of other products, and the sale of the reverse mortgage and other 
products is separated in time. The president of NRMLA also indicated 
that in any event, borrowers should receive a clear disclosure, 
informing them that they are under no obligation to purchase any other 
product or service with their reverse mortgage funds. 

State Efforts to Enforce Insurance Laws Have Identified Instances of 
Inappropriate Cross-Selling: 

Many states have passed suitability laws that are designed to protect 
consumers from being sold unsuitable insurance products, including 
annuities. At least 26 states have adopted the National Association of 
Insurance Commissioners (NAIC) model regulation for suitability in 
annuity transactions. In addition, at least 10 other states have 
adopted other legislation or regulations related to the suitability of 
insurance products. The NAIC model regulation states that in 
recommending to a consumer the purchase of an annuity, the insurance 
producer shall have reasonable grounds for believing that the 
recommendation is suitable for the consumer on the basis of the facts 
disclosed by the consumer. In addition, a few states allow citizens to 
cancel policies of individual life insurance or individual annuity 
contracts within a certain period from the date of purchase, regardless 
of whether these products were purchased with reverse mortgage funds. 
Furthermore, certain states have enacted laws specific to reverse 
mortgages. For example, according to the California Civil Code, a 
reverse mortgage lender cannot offer, or refer the borrower to any 
other party who will offer, an annuity to the borrower before closing 
on a reverse mortgage. 

A number of state insurance regulators reported recent examples of 
violations of their state insurance laws that involved HECM funds. 
Through NAIC, we sent a set of standardized questions on cross-selling 
practices to insurance commissioners from all 50 states and the 
District of Columbia. Of the 29 state insurance regulators that 
responded to our questions, 8 said that from 2005 through January 2009, 
they had at least one case of an insurance agent selling an unsuitable 
insurance product that a consumer had purchased using reverse mortgage 
funds. Of those 8 regulators, 4 said their states took formal or 
informal action against the companies that sold these products. Cross- 
selling cases that involved actual or potential violations of state 
insurance laws included the following: 

* An official at the Insurance Division of the Hawaii Department of 
Commerce and Consumer Affairs described a case in which an independent 
mortgage broker was prosecuted for misrepresentation of an annuity 
product. The broker, who also owned his own insurance company, deceived 
15 clients by including paperwork for an annuity in their HECM closing 
documents without their knowledge. The clients did not realize they 
were signing to purchase an annuity in addition to a reverse mortgage, 
and the broker collected fees from the HECM sale and commission from 
the annuity. 

* A sales manager of an insurance company violated the Maine Insurance 
Code by allowing transactions that were not in the best interest of the 
customer. The sales manager had arranged for a representative of a 
large reverse mortgage lender to speak with his sales agents about 
reverse mortgages. The agents then referred 14 clients to the reverse 
mortgage lender, all of whom obtained reverse mortgages. One particular 
client, an 81-year old widow, was contacted continually until she 
obtained her reverse mortgage funds, and was then sold a deferred 
annuity. The interest rate accruing on the reverse mortgage was 4.12 
percent, and the deferred annuity earned only 3.25 percent. 

* In California, two insurance agents are accused of designing a 
seminar to teach licensed insurance and real estate agents how to sell 
reverse mortgages to senior citizens in conjunction with annuities. It 
is further alleged that they were teaching agents to convince senior 
homeowners that purchasing an annuity with reverse mortgage funds is a 
condition of obtaining the loan. The California Department of Insurance 
is currently investigating this case. 

While state insurance laws have captured some cases of inappropriate 
cross-selling to HECM borrowers, regulators may not always be aware 
when suitability violations involve inappropriate cross-selling. For 
example, a FINRA representative noted that the source of funds used to 
purchase an unsuitable annuity may not be relevant for determining a 
violation of FINRA's suitability standards, so examiners may not always 
know if HECM funds were used. Consumer complaints also could indicate 
the potential extent of inappropriate cross-selling; however, federal 
and state agencies do not specifically track complaints related to this 
practice. For example, an NAIC official told us that while NAIC's 
complaint database contains a code for annuity complaints, it does not 
track whether these complaints involved reverse mortgages. In addition, 
of the 29 state insurance regulators who responded to our questions, 14 
indicated that their agency does not have a searchable database for 
complaints. 

HUD's Internal Controls Do Not Provide Reasonable Assurance That 
Counseling Agencies Are Complying with HECM Counseling Requirements: 

HUD's internal controls for HECM counseling do not provide reasonable 
assurance of compliance with HUD requirements. The results of our 
limited testing of HECM counseling sessions found that counselors 
omitted information required by HUD, particularly on alternatives to 
HECMs and the financial implications of these loans. We also found that 
HUD records did not always accurately reflect the content and length of 
counseling sessions, thereby undermining the usefulness of HUD controls 
that rely on these records. As a result of these control weaknesses, 
some prospective borrowers may not be receiving the information needed 
to make informed decisions about obtaining a HECM. 

HUD Uses a Range of Internal Controls to Ensure Compliance with 
Counseling Standards, but Has Not Tested Their Effectiveness: 

HUD has a range of internal control mechanisms to help ensure that HECM 
counselors comply with counseling requirements. GAO's guidance entitled 
Standards for Internal Control in the Federal Government states that 
internal controls should provide reasonable assurance that agency 
objectives--in this case, ensuring that prospective HECM borrowers are 
well-informed--are being achieved.[Footnote 28] According to HUD 
officials, HUD's internal controls include the following: 

1. counseling standards as set forth in regulations, mortgagee letters, 
and a counseling protocol; 

2. a counselor training and certification program; 

3. a Certificate of HECM Counseling (counseling certificate) that, once 
signed by the counselor and the counselee, should provide HUD with 
assurance that counselors complied with counseling standards and that 
prospective borrowers were prepared to make informed decisions; 

4. a monitoring process in which HOC staff oversee the performance of 
counseling agencies and HUD headquarters staff oversee grant agreements 
with HECM intermediaries; and: 

5. pre-and post-insurance checks by contractors and HUD field staff of 
HECM loan files to ensure that a signed counseling certificate is 
present for each loan. 

Although GAO's internal control standards encourage agencies to test 
the effectiveness of their internal controls, HUD has not done so for 
the controls we have previously described. HUD officials told us that 
they recognize the importance of such testing and have pursued methods 
to determine whether HECM counseling clients were receiving required 
information. For example, HOC staff survey small samples of clients for 
all types of housing counseling about their counseling sessions, but 
staff from two of the HOCs told us that they receive few responses. 
While this survey does not currently contain any questions specific to 
HECM counseling, HUD staff have drafted a new survey that will focus 
exclusively on HECM counseling. Additionally, HUD funded the 
development of an AARP project to independently observe HECM counseling 
sessions and provide feedback to the counselors. However, a HUD 
official indicated that the project will not be implemented until 
fiscal year 2010 due to a transfer in project leadership from AARP to 
NeighborWorks® America, another nonprofit organization involved in the 
HECM counseling program. Representatives from Money Management 
International, Inc. (MMI), a national intermediary that received HUD 
fiscal year 2008 grant funds for HECM counseling, told us that they 
record and review recordings of counseling sessions as part of their 
quality control process.[Footnote 29] However, HUD officials said that 
they do not see the overall results of those reviews. HUD staff also 
advised us that HUD had recently revised the review checklist used by 
its staff to evaluate counseling agency performance to include a 
section specifically on HECM counseling. 

Our Evaluation of Counseling Sessions Indicated Noncompliance with Key 
HECM Counseling Requirements: 

Our independent evaluation of HECM counseling sessions found that 
counselors did not consistently comply with HECM counseling 
requirements. To test counselor compliance with key HECM counseling 
requirements, GAO staff posed as prospective HECM borrowers for 15 
counseling sessions offered by 11 different agencies. We scheduled 
these sessions with HECM counselors who were employed by agencies that 
have provided some of the highest numbers of HECM counseling sessions. 
[Footnote 30] These agencies included branches or affiliates of two 
national intermediaries--MMI and the National Foundation for Credit 
Counseling, Inc. (NFCC)--that received HECM counseling grant money in 
fiscal year 2008, as well as other HUD-approved agencies. For each 
session, we determined whether the counselors covered required topics, 
primarily those referenced in HUD's counseling certificate, which 
counselors are required to complete. The certificate identifies or 
refers to counseling requirements originally set forth in statute, HUD 
regulations, or mortgagee letters. (See appendix II for a copy of a 
blank counseling certificate.) Our undercover counselees participated 
in telephone counseling sessions because HUD estimated that about 90 
percent of all HECM counseling sessions were conducted in this manner. 
[Footnote 31] Our assessment primarily focused on whether counselors 
conveyed basic information on required topics, not whether counselors 
exhaustively covered each topic. In addition, we assessed limited 
aspects of how the counselors presented the information (see appendix 
III). The counselor for each session sent our undercover counselee a 
signed counseling certificate certifying compliance with HUD 
requirements. 

Counselors Did Not Cover All of the Required Information to Which the 
Counseling Certificate Refers: 

Although none of the 15 counselors covered all of the required topics, 
all of them provided useful and generally accurate information about 
reverse mortgages and discussed key program features. For example, in 
discussing the financial implications of the loan, most counselors 
provided information on the growth in the HECM line of credit and 
explained that the loan balance would increase over time. In addition, 
most counselors also explained that the loan would become due and 
payable when no borrower lives in the property, and that borrowers must 
pay taxes and insurance. Counselors also often supplemented their 
discussions with useful information, such as a description of factors 
that affect available interest rates and the fact that borrowers would 
receive monthly statements from the lender, even though this 
information is not specifically referred to on the counseling 
certificate. When our undercover counselees specifically asked for help 
in finding a lender, or asked directly for a recommendation, the 
counselors appropriately explained that they were not permitted to do 
so and some referred the counselees to the HUD Web site for a listing 
of lenders.[Footnote 32] At the end of the sessions, all of the 
counselors informed the undercover counselees that they could call back 
with additional questions. 

However, despite certifying on the counseling certificate that they had 
covered, in detail, all of the information HUD requires, all of the 
counselors omitted at least some required information (see figure 4). 

Figure 4: Summary of Counselors' Compliance with HUD's HECM Counseling 
Requirements: 

[Refer to PDF for image: table] 

HECM counseling requirements: 1. Options other than a HECM that are 
available to the homeowner(s), including other housing, social service, 
health, and financial options; 
Summary: 
Yes: 8; 
Partly: N/A; 
No: 7. 

HECM counseling requirements: 2. Other home equity conversion options 
that are or may become available to the homeowner(s), such as other 
reverse mortgages, sale-leaseback financing, deferred payment loans, 
and property tax deferral; 
Summary: 
Yes: 8; 
Partly: N/A; 
No: 7. 

HECM counseling requirements: 3. The financial implications of entering 
into a HECM; 
Summary: 
Yes: 0; 
Partly: 14; 
No: 1. 

HECM counseling requirements: 3. The financial implications of entering 
into a HECM explaining[A] the advantages and disadvantages of each 
payment plan[B]; 
Summary: 
Yes: 6
Partly: N/A; 
No: 9. 

HECM counseling requirements: 3. The financial implications of entering 
into a HECM explaining[A] the steps followed in determining the 
borrower’s principal limit, including all loan costs and set asides[C]; 
Summary: 
Yes: 9; 
Partly: N/A; 
No: 6. 

HECM counseling requirements: 3. The financial implications of entering 
into a HECM explaining[A] the increase in the loan balance and likely 
decrease in the borrower’s equity over time;
Summary: 
Yes: 11; 
Partly: N/A; 
No: 4. 

HECM counseling requirements: 3. The financial implications of entering 
into a HECM explaining[A] the growth of the HECM line of credit; 
Summary: 
Yes: 12; 
Partly: N/A; 
No: 3. 

HECM counseling requirements: 3. The financial implications of entering 
into a HECM explaining[A] the borrower’s ongoing responsibility to pay 
property taxes, ground rents, and insurance either directly or 
indirectly by electing to require the mortgagee to withhold funds from 
monthly payments or to charge such funds to a line of credit[D]; 
Summary: 
Yes: 1; 
Partly: N/A; 
No: 14. 

HECM counseling requirements: 3. The financial implications of entering 
into a HECM explaining[A] calculating the maximum funds available to 
HECM borrower(s) and payment plan options using a computer software; 
program.
Summary: 
Yes: 9; 
Partly: N/A; 
No: 6. 

HECM counseling requirements: 4. A disclosure that a HECM may have tax 
consequences, affect eligibility for assistance under federal and state 
programs, and have an impact on the estate and heirs of the 
homeowner(s); 
Summary: 
Yes: 9; 
Partly: 6; 
No: 0. 

HECM counseling requirements: 4.a. A disclosure about tax consequences; 
Summary: 
Yes: 13; 
Partly: N/A; 
No: 2. 

HECM counseling requirements: 4.b. A disclosure that some federal or 
state programs, such as Supplemental Security Income, could be 
affected; 
Summary: 
Yes: 9; 
Partly: N/A; 
No: 6. 

HECM counseling requirements: 4.c. A disclosure about the impact on the 
estate and heirs of the homeowner(s); 
Summary: 
Yes: 13; 
Partly: N/A; 
No: 2. 

HECM counseling requirements: 5. Whether the homeowner(s) has signed a 
contract or agreement with an estate planning service firm that 
requires, or purports to require, the mortgagor to pay a fee on or 
after closing that may exceed amounts permitted by the Secretary or in 
Part 206 of the HUD regulations at 24 CFR; 
Summary: 
Yes: 1; 
Partly: N/A; 
No: 14. 

HECM counseling requirements: 6. If such a contract has been signed, 
the extent to which services under the contract may not be needed or 
may be available at nominal or no cost from other sources, including 
the mortgagee[E]; 
Summary: 
Yes: N/A; 
Partly: N/A; 
No: N/A. 

HECM counseling requirements: 7. The HECM will be due and payable when 
no remaining borrower lives in the mortgaged property, or when any 
other covenants of the mortgage have been violated; 
Summary: 
Yes: 7; 
Partly: 7; 
No: 1. 

HECM counseling requirements: 7.a. When no borrower lives in the 
property; 
Summary: 
Yes: 13; 
Partly: N/A; 
No: 2. 

HECM counseling requirements: 7.b. When any of the covenants have been 
violated[F]; 
Summary: 
Yes: 7; 
Partly: 7; 
No: 1. 

HECM counseling requirements: When any of the covenants have been 
violated: Must pay taxes and insurance; 
Summary: 
Yes: 13; 
Partly: N/A; 
No: 2. 

HECM counseling requirements: When any of the covenants have been 
violated: Must not change the title; 
Summary: 
Yes: 8; 
Partly: N/A; 
No: 7. 

Actual length of counseling time in minutes: 
Counseling session 1: 39; 
Counseling session 2: 22[G]; 
Counseling session 3: 26[G]; 
Counseling session 4: 46; 
Counseling session 5: 57[G]; 
Counseling session 6: 30[G]; 
Counseling session 7: 52; 
Counseling session 8: 66; 
Counseling session 9: 64; 
Counseling session 10: 41; 
Counseling session 11: 52; 
Counseling session 12: 26; 
Counseling session 13: 20[G]; 
Counseling session 14: 39; 
Counseling session 15: 45[G]. 

Source: GAO. 

[A] Items "a" through "f" of this requirement are contained in HUD 
Mortgagee Letter 2004-25, which specifies the criteria that counselors 
must meet for explaining the financial implications of a HECM. 

[B] Counselors who did not meet this requirement usually omitted a 
reference to the term payment plan, although they always discussed the 
line of credit payment plan and usually discussed the tenure and 
combination payment plans. 

[C] Counselors who did not meet this requirement provided much of the 
required information, but omitted some information, such as an 
explanation of the servicing fee set-aside. 

[D] While most counselors explained that borrowers must pay taxes and 
insurances (see row 7), they did not explain that borrowers could make 
these payments directly or require the lender to do so indirectly. We 
did not test for any mention of ground rents (rent paid for leasing 
land) during counseling sessions, because such payments are not common. 

[E] This question did not apply, since none of our undercover 
counselees would have answered affirmatively to the prior question 
(i.e., Did you sign a contract?), had the question been asked. 

[F] The counseling certificate does not refer to specific types of 
covenants. To verify this requirement, we identified whether counselors 
referred to the borrower requirements to pay taxes and insurance and to 
not change the title, because these are used as examples in the HUD 
counseling protocol. 

[G] These counselors did not accurately record the length of the 
session on the counseling certificate. 

[End of figure] 

The required information that counselors most frequently omitted 
included the following: 

* Other housing, social service, health, and financial options: Seven 
of the 15 counselors did not discuss options, other than a HECM, that 
might be available to a homeowner, such as considering other living 
arrangements, meal programs, or health services that local social 
service agencies might provide. Our findings are consistent with 
findings in AARP and HUD Office of Inspector General reports suggesting 
that counselors may not always be discussing alternatives to a reverse 
mortgage with clients.[Footnote 33] Although the other 8 counselors did 
present options, most did so broadly, referring our undercover 
counselees to a nationwide, toll-free telephone number for the National 
Association of Area Agencies on Aging for more information, rather than 
providing specific information about local resources. However, 1 
counselor did provide our agents with specific telephone numbers or Web 
sites for specific programs, such as those sponsored by a state's 
department of aging and organizations that assist senior citizens with 
meeting home energy needs and obtaining prescription drugs. Although 
HUD guidance on this point is not explicit, HUD officials told us that 
they expect counselors to be knowledgeable about local resources, even 
if the counseling sessions were conducted by telephone. 

* Other home equity conversion options: The same 7 counselors likewise 
did not discuss other types of (and potentially lower-cost) reverse 
mortgages that state or local governments might sponsor for specific 
purposes. For example, some state governments provide reverse mortgages 
for payment of taxes or for making major repairs that do not need to be 
repaid until the house is sold. These loans, which also could be 
contingent on the income of the applicant, may be appropriate for 
borrowers who need to cover specific types of costs.[Footnote 34] 

* The financial implications of entering into a HECM: Fourteen 
counselors only partially met this requirement, and 1 did not, because 
they omitted information that HUD directs counselors to convey. 
[Footnote 35] For example, 6 of the counselors did not provide 
estimates (using computer software) of the maximum amount of funds that 
might be available to the counselee under the HECM payment plan 
options. According to a HUD official, the purpose of providing these 
estimates is to help prospective borrowers understand how reverse 
mortgages would address their financial situations. For example, if a 
potential borrower needs to pay off an existing mortgage, receiving 
HECM funds in monthly payments might not be appropriate. Additionally, 
14 counselors did not tell counselees that they could elect to have the 
loan provider withhold funds to pay property taxes and insurance, and 9 
counselors omitted basic information about the advantages and 
disadvantages of each payment plan (i.e., they usually did not address 
the term plan). 

* A disclosure that a HECM may affect eligibility for assistance under 
other federal and state programs: While most counselors discussed the 
tax consequences of a HECM, 6 of 15 did not indicate that eligibility 
for some federal and state programs could be affected if borrowers had 
more money in their bank accounts than allowed under such programs' 
terms. For example, eligibility for a means-tested program, such as the 
federal government's Supplemental Security Income (SSI), could be 
affected if borrowers deposited in their bank accounts an amount of 
money that exceeded the program's threshold for countable resources by 
the end of the month.[Footnote 36] 

* Asking if a homeowner had signed a contract or agreement with an 
estate planning service:[Footnote 37] HUD implemented this requirement 
on the basis of a statutory provision intended to protect HECM 
borrowers from paying excessive fees for third-party services that are 
of little or no value. To illustrate, an estate planning service might 
charge a fee, unauthorized by HUD, because it "arranged" for borrowers 
to obtain a HECM. However, 14 of the 15 counselors did not ask this 
question, although of the 14, 4 cautioned the undercover counselees 
that such services were unnecessary to obtain a HECM. If a counselee 
responds affirmatively to this question, HUD requires the counselor to 
discuss the extent to which services under the contract may not be 
needed or may be available from other sources at no or nominal costs. 

The results of our review indicate that signed counseling certificates 
are not a reliable indicator that the counselors complied with HUD 
requirements. Nevertheless, HOC staff (consistent with their procedures 
for reviewing counseling agencies) consider the presence of a signed 
certificate in a counseling agency's files to be a key compliance 
indicator. Additionally, HUD requires a signed certificate as a 
condition of insuring a HECM and performs checks to ensure compliance 
with this requirement. Thus, the fact that we observed a substantial 
amount of noncompliance despite the existence of a signed counseling 
certificate for each undercover session raises questions about the 
effectiveness of HUD internal controls that rely on the validity of the 
certificate. 

In addition, HUD considers having a network of examination-certified 
counselors as an internal control that helps ensure compliance with 
counseling requirements. HUD expects to issue regulations in 2009 that 
will require all HECM counselors to pass a written examination, 
establish a roster of eligible HECM counselors, require counselors to 
meet continuing education requirements, and allow HUD to remove 
counselors for cause.[Footnote 38] HUD believes that this proposed rule 
will help improve the quality of HECM counseling. However, all but 1 of 
the counselors who conducted our counseling sessions were examination- 
certified, and they all omitted required information but still signed 
the counseling certificate. These results suggest that examination 
certification by itself does not ensure high levels of compliance. 

Some Counselors Overstated the Amount of Time That They Spent 
Counseling Clients: 

In addition to requiring HECM counselors to convey certain information, 
HUD requires them to record the length of each counseling session on 
the counseling certificate. Although HUD has not issued guidance on the 
subject, HUD officials told us that the recorded time should reflect 
only the time spent counseling the client. HUD does not prescribe how 
long a counseling session should last, but the department uses this as 
a factor in monitoring the performance of counseling providers and 
awarding counseling grant funds.[Footnote 39] For example, HUD 
officials told us that HOC staff responsible for overseeing HECM 
counseling providers examine the times on the counseling certificates 
to identify those sessions that are unreasonably short, to help 
identify potential performance problems. Staff from two of the HOCs 
noted that unusually short counseling times or discrepancies between 
actual and recorded times would prompt follow-up actions. AARP's 2007 
study indicated that counseling provided by examination-qualified 
counselors, who were obligated to follow the HECM counseling protocol 
in effect at the time, typically lasted over 1.5 hours.[Footnote 40] 

Six of the 15 counselors for our undercover sessions overstated the 
length of the counseling sessions on the counseling certificates. All 6 
worked for counseling agencies that received or were eligible to 
receive HUD HECM counseling grant funds in 2008. In 3 of these cases, 
the sessions ranged from 22 to 30 minutes, but the recorded times 
ranged from 45 minutes to 1 hour. In a 4th instance, the session lasted 
about 20 minutes, but the counselor recorded 30 minutes. These 4 
sessions, for which our undercover counselees were charged customary 
fees of $75 to $125, were the shortest we observed and omitted much of 
the required information, particularly the discussion of options and 
various aspects of the financial implications of a HECM. An intake 
staff person from 1 of the counseling agencies told us that the 
agency's counselors generally conducted 3 to 4 HECM counseling sessions 
every 2 hours, and a counselor from this agency indicated that a 
session likely would last no more than 10 minutes. The counselors for 
the remaining 2 sessions (1 of which was more comprehensive than many 
others) also overstated the time on the certificate, recording the 
sessions as lasting 2 hours, when 1 lasted 45 minutes and the other 57 
minutes. 

For the other 9 sessions, which typically lasted anywhere from about 30 
minutes to about 1 hour (see figure 4), the counselors recorded the 
entire length of the session on the counseling certificate and did so 
in a generally accurate manner. However, the times they recorded 
included the amounts of time they took to obtain and process credit 
card information and, in some cases, to read a disclosure statement 
describing the agency's counseling policies. The amounts of time 
differed by agency, but in one instance, the noncounseling time totaled 
about 13 minutes (out of a 39-minute session). While HUD has not issued 
specific guidance regarding what activities should be recorded as part 
of the counseling time, times recorded on the certificate do not 
necessarily reflect the amount of time that counselors spent on 
supplying HUD-required information. 

The considerable variation both in the length of the sessions (ranging 
from 20 to 66 minutes) and in how counselors recorded time on the 
certificates raises questions about the consistency of HECM counseling 
and the reliability of the information that HUD uses to monitor 
counseling providers. The lack of a mechanism to ensure that counselors 
record counseling times more accurately and uniformly undermines HUD's 
ability to identify and act on performance problems and ensure that 
counselees are getting their money's worth. 

Counseling Agencies Did Not Always Obtain Minimum Information for 
Applying the Counseling Fee Means Test: 

In May 2008, HUD issued instructions allowing counseling agencies to 
charge a fee of up to $125 for HECM counseling, as long as the fee did 
not create a financial hardship for the client.[Footnote 41] The 
instructions require counseling agencies to make a determination of the 
client's ability to pay (means test) by considering factors, including, 
but not limited to, the client's income and debt obligations. The 
instructions also stress that the client should be informed of the fee 
before receiving counseling, and that no client should be turned away 
due to an inability to pay. These requirements are particularly 
significant because federal resources dedicated to fund HECM counseling 
have been limited and lenders are prohibited from paying for counseling 
services.[Footnote 42] As a result, prospective HECM borrowers are more 
likely to pay for the counseling themselves, either up front or by 
financing the fee in the mortgage. 

Consistent with HUD requirements, 12 of the 15 counseling agency staff 
responsible for charging the fee, whether intake staff or counselors, 
informed our undercover counselees of the fee in advance of the session 
and charged $125 or less.[Footnote 43] However, staff at most of the 
agencies did not collect the minimum amount of information that HUD 
requires to perform the means test. More specifically: 

* For 4 of the 15 sessions, agency intake staff took the counselee's 
credit card information up front, without obtaining any information 
about income and debt obligations, although counselors for 3 of these 
sessions later asked for the person's income but not their debt. The 
counselor for the other session did not ask for any additional 
financial information. 

* Four other counselors asked about the undercover counselees' income, 
but not their debts. 

* Four counselors, all from MMI, did not ask directly about income and 
debts, but asked a series of screening questions to identify certain 
types of potential financial hardship. Specifically, these counselors 
asked whether the undercover counselees were in a hospice or had 
declared bankruptcy, or whether the home was in foreclosure. The 
counselors also indicated that they could waive the fee if the 
counselee did not have the ability to pay. MMI confirmed that this 
approach was consistent with their screening policies and noted that 
should a counselee feel unable to afford the fee, qualification for a 
fee waiver would be determined by completion of a debt and income 
analysis during the counseling session. NFCC representatives indicated 
that many of their affiliates use these types of screening questions, 
as well, to determine if the counseling fee should be waived. Two 
counselors did not collect any financial information from the 
undercover counselees. 

* Two other counselors did not collect any financial information from 
the undercover counselees. 

* One counselor did collect information about the undercover 
counselee's income and debt, but did so to analyze the counselee's 
budget. 

Although HUD has instructed counseling agencies to consider a client's 
debt and income, it has not developed criteria or thresholds for using 
this information. Additionally, HUD guidance states that agencies may 
use "objective criteria" in assessing a client's ability to pay, but 
does not specify what types of criteria are appropriate. Officials from 
the two national intermediaries told us that HUD's guidance could use 
clarification. In the absence of clear guidance, similarly situated 
counselees could be treated differently, and those facing financial 
hardships may be paying for counseling when they should not have to 
pay. 

Counselors Did Not Always Comply with Other Provisions in HUD's 
Counseling Protocol: 

The HUD HECM counseling protocol, which HUD adopted in 2006 and plans 
to issue in a substantially expanded version in 2009, summarizes 
counseling requirements and identifies procedures that HUD Network 
Counselors, which include counselors employed by the national 
counseling intermediaries, must follow.[Footnote 44] While much of the 
protocol summarizes counseling requirements referenced in the housing 
certificate, it also requires counselors to (1) send clients 
information packages about the financial implications of reverse 
mortgages before or after the counseling session, (2) discuss an 
estimated TALC disclosure with the client, (3) collect specific 
information about the client's financial needs and goals, and (4) send 
certain educational materials to clients who express an interest in 
purchasing an annuity. HUD expects to issue regulations in 2009 that 
will make compliance with a revised protocol mandatory for all HECM 
counselors.[Footnote 45] The revised protocol, currently in draft, 
expands on some of these requirements and requires counselors to ask a 
series of questions to determine whether the counselees understand the 
essential features of a reverse mortgage. 

The counselors for all of our 15 undercover counseling sessions were 
required to follow the protocol because they were HUD Network 
Counselors. However, we found significant noncompliance with the 
protocol requirements that we previously cited. 

* The protocol requires that the information package on financial 
implications be sent to the client before or after the counseling 
session. Among other things, the package should contain customized 
information, including estimates of cash advances that would be 
available to the counselee under the different payment options, an 
estimated TALC disclosure and estimates of projected loan costs, and a 
loan amortization table. However, only 1 of the 15 counselors sent an 
information package containing all of the required information (see 
figure 5). Additionally, 8 counselors sent our undercover counselees a 
package that did not contain any customized information, and 3 others 
sent only some of the customized information. Furthermore, although the 
protocol requires counseling agencies to offer the client the option of 
receiving the information package before the counseling session, our 
undercover counselees received no such offer in 13 cases.[Footnote 46] 
Of the 2 counseling agencies that offered to send the package, only 1 
actually did so. NFCC officials told us that sending an information 
package beforehand is important, especially before telephone 
counseling, so that the counselor and counselee can reference the same 
documents during the session. Our evaluation of the packages we 
received also suggests that the ability to refer to written material 
during the counseling session can enhance counselees' understanding of 
HECMs (see figure 5 and appendix III for additional information). 

Figure 5: Summary of Information Packages: 

[Refer to PDF for image: table] 

Package requirement: HECM counseling certificates; 
Counseling sessions which included this information in the package: 1, 
2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 16. 
Counseling sessions which did not include this information in the 
package: [Empty]. 

Package requirement: Estimates of cash advances and itemized costs for 
different payment plans and interest rates; 
Counseling sessions which included this information in the package: 5, 
7, 9, 11, 14, 15. 
Counseling sessions which did not include this information in the 
package: 1, 2, 3, 4, 6, 8, 10, 12, 13, 

Package requirement: Loan amortization schedule(s); 
Counseling sessions which included this information in the package: 5, 
8, 11, 14, 15; 
Counseling sessions which did not include this information in the 
package: 1, 2, 3, 4, 6, 7, 9, 10, 12, 13. 

Package requirement: Estimates of projected costs, including the 
servicing fee and a representation of the TALC; 
Counseling sessions which included this information in the package: 5, 
8, 11, 14, 15; 
Counseling sessions which did not include this information in the 
package: 1, 2, 3, 4, 6, 7, 9, 10, 12, 13. 

Package requirement: A brochure on using an HECM to buy an annuity; 
Counseling sessions which included this information in the package: 1, 
4, 7, 9, 10, 14. 
Counseling sessions which did not include this information in the 
package: 2, 3, 5, 6, 8, 11, 12, 13, 15. 

Package requirement: A one-page summary of “Important Information about 
HECM Counselors, Lenders, Loans, and Loan Costs”; 
Counseling sessions which included this information in the package: 1, 
4, 7, 9, 10, 14; 
Counseling sessions which did not include this information in the 
package: 2, 3, 5, 6, 8, 11, 12, 13, 15. 

Package requirement: A one-page summary on “Steps in the Reverse 
Mortgage Lending Process”; 
Counseling sessions which included this information in the package: 1, 
4, 7, 10, 14, 15. 
Counseling sessions which did not include this information in the 
package: 2, 3, 5, 6, 8, 9, 11, 12, 13. 

Source: GAO. 

Note: While only the counselors for sessions 4, 5, and 6 were obligated 
to include the information on annuities (because their counselees 
expressed interest), 5 other counselors included this information in 
their packages. 

[End of figure] 

* The protocol requires that HECM counselors discuss an estimated TALC 
disclosure that HECM borrowers must sign at loan closing, but 8 
counselors did not describe the disclosure or its implications during 
the sessions. The estimated TALC, which shows the average annual costs 
of a reverse mortgage at different points in time, is important because 
it illustrates that from a cost perspective, reverse mortgages are 
generally not a good choice for borrowers who plan on having the loan 
for only a few years. However, because the TALC is fairly complex, 
borrowers could have difficulty understanding it without assistance. 
Furthermore, Federal Reserve officials indicated that this disclosure 
also allows borrowers to compare costs across lenders and should be 
explained at the time of counseling. 

* The protocol also directs counselors to collect specific information 
about the client's needs and goals--such as why the client would like 
to obtain a HECM, their financial situation, the condition of their 
home, and how long they plan to stay in the home--because these factors 
can affect the suitability of a reverse mortgage. While almost all of 
the counselors asked why the undercover counselees wanted a reverse 
mortgage, none asked for all of the financial information (income, 
assets, liabilities, and debt) prescribed in the protocol. Furthermore, 
although the protocol instructs counselors to ask if the counselee has 
any unpaid federal debt (which would render a person ineligible for a 
HECM until the debt was paid), 13 did not ask this question. Six 
counselors did not ask how long the undercover counselees planned to 
stay in their homes or if the homes needed repairs. 

* Finally, if counselees indicate that they are considering purchasing 
an annuity with their HECM funds, the protocol requires counselors to 
send them specific information, including comparisons of the costs and 
benefits of HECMs to those for different types of annuities.[Footnote 
47] For 3 different counseling sessions, our undercover counselees 
indicated that they were considering such a purchase.[Footnote 48] 
Consistent with the protocol, the counselors provided information and 
observations about taking this step, and 2 of the 3 counselors also 
sent the required information. In addition, although required in the 
protocol, none of the 3 counselors annotated the counseling certificate 
with a note indicating that discussions about annuities took place. 

Despite the importance of the protocol requirements, we also found that 
HOC staff responsible for assessing the performance of counseling 
agencies were not always familiar with the protocol and had not 
incorporated the protocol standards in their performance reviews. For 
example, the standard checklist that HOC staff use to conduct their 
reviews does not include protocol requirements, such as offering to 
send a package before the counseling session and providing information 
about annuities. HUD officials acknowledged this shortcoming and told 
us that they were planning to update the checklist to reflect a 
forthcoming revision of the protocol. 

HUD Lacks Internal Controls with Which to Oversee the Counselor 
Referral Process: 

HUD lacks controls to ensure that lenders comply with the counseling 
agency referral process, which HUD designed to prevent lenders from 
steering potential borrowers to particular counselors. HUD requirements 
state that when first contacted by a prospective HECM borrower, a 
lender must provide the individual with a list of entities that perform 
HECM counseling. At the time of our fieldwork, HUD's written 
instructions required that the list contain six references, including 
no fewer than five HUD-approved counseling agencies in the local area 
or state (except in cases in which fewer than five agencies serve a 
particular state).[Footnote 49] One of those agencies had to be located 
within reasonable driving distance so that the prospective borrower had 
the option of receiving face-to-face counseling. In addition, the list 
was to include a toll-free telephone number to reach a network of 
counselors approved to conduct telephone counseling nationwide. In 
March 2009, HUD increased the required number of references from 6 to 
10 and restated the importance of lenders providing prospective 
borrowers with such a list.[Footnote 50] 

Despite HUD's renewed emphasis on the requirement, HUD officials told 
us that they do not have internal control procedures in place to check 
lenders' compliance. One official noted that it would be challenging to 
create such a control because a prospective borrower could obtain a 
list of counselors from one lender, receive the counseling, and then 
decide to get the HECM from a second lender. In that situation, HUD 
would have no way of knowing what the first lender provided the 
borrower because there would be no loan case file from that lender for 
HUD to examine. However, the frequency of this situation is unknown, 
and without a control procedure, HUD lacks assurance that its referral 
requirements are being followed. Furthermore, while some HECM borrowers 
may obtain a list of counselors from one lender and get the loan from 
another, this scenario does not rule out taking reasonable steps to 
assess the compliance of the lender ultimately selected. For example, 
HUD could require lenders to place the lists of counselors they provide 
to prospective borrowers in the loan files. HUD's periodic examination 
of loan files could include a check for these lists. 

Furthermore, the results of our undercover work at reverse mortgage 
information seminars sponsored by seven HECM providers and the results 
of a HUD Inspector General audit suggests some noncompliance with the 
referral requirement.[Footnote 51] Our staff, posing as prospective 
HECM borrowers, asked representatives of the seven providers for 
referrals to counselors. However, none of the five to whom this 
requirement applied and replied to our request, complied fully with HUD 
requirements.[Footnote 52] More specifically: 

* One representative provided the telephone number typically used to 
set up telephone counseling sessions with one of the two national 
intermediaries. 

* Two representatives said that when our undercover staff were ready to 
speak with a counselor, they would make the appointment for them. 

* Two California-based HECM representatives provided a list of 
counselors, but each list identified only five counseling agencies, and 
did not provide the minimum number of five state or local agencies. 

Conclusions: 

HECMs have the potential to play a key role in meeting the needs of 
seniors facing financial hardship or seeking to improve their quality 
of life. However, the product is relatively complex and costly and the 
population it serves is vulnerable. These factors, combined with the 
increasing number of borrowers and lenders participating in the HECM 
program, underscore the need for federal agencies to be vigilant about 
emerging consumer protection risks. Our work identified risks that 
require further attention, particularly in the areas of HECM marketing 
and counseling. 

Although the extent of potentially misleading HECM marketing is 
unknown, the types of marketing claims discussed in this report are 
causes for concern, particularly in a market with potential for 
substantial growth. HUD, FTC, and the federal banking regulators have 
processes to address misleading marketing practices and have reported 
few problems. Nevertheless, the potentially misleading marketing claims 
we identified suggest that some HECM providers may not be maintaining 
sufficient focus on or awareness of federal marketing standards. 
Furthermore, consumers who have not been cautioned about such claims 
could pursue HECMs with misunderstandings about the product. 

Counseling is a critical feature of the HECM program because the 
information provided can increase prospective borrowers' understanding 
of a complex product and help them make informed decisions. Although 
HUD is in the process of expanding and strengthening its counseling 
requirements, it lacks sufficient internal controls to ensure that 
counseling providers are complying with these requirements. HUD's 
controls rely to a significant degree on the presence of one document, 
the signed counseling certificate, as an assurance of compliance. 
However, our work indicates that HUD cannot rely on this certificate 
without additional verification of the content and length of the 
counseling session. In the absence of a verification process, HUD's 
counseling program is vulnerable to three main problems. First, and 
most importantly, counselees may not be receiving the information they 
need to make informed decisions. Second, HUD's information on the 
amount of time that counselors are spending with clients may be 
inaccurate and, therefore, of limited value to HOC staff responsible 
for monitoring counselor performance. Third, HUD lacks assurance that 
counseling agencies are consistently applying the means test for 
counseling fees, if at all; as a result, financially distressed 
individuals who are eligible for fee waivers may be paying for 
counseling that they could obtain without a fee. Additionally, HUD 
lacks detailed guidance on how to record counseling times and apply the 
means test, which may be contributing to counseling providers' 
noncompliance in these areas. Finally, because HUD lacks effective 
controls over the counselor referral process, it cannot ensure that 
prospective borrowers are receiving the required range of counseling 
choices, including options for face-to-face and telephone counseling. 

Recommendations for Executive Action: 

To enhance consumer protection from potentially misleading marketing, 
we recommend that 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, 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. 

To improve HUD's oversight of HECM counseling, we recommend that the 
Secretary of HUD 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 take the 
following steps: 

* implement methods to verify the content and length of HECM counseling 
sessions; 

* issue detailed guidance for HECM counseling providers about how to 
record the amount of counseling time on the counseling certificate; 

* issue detailed procedures for HECM counseling providers on how to 
assess prospective counselees' ability to pay for HECM counseling; and: 

* implement internal controls to ensure that HECM providers comply with 
counselor referral requirements. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Department of Housing and 
Urban Development, Federal Trade Commission, Board of Governors of the 
Federal Reserve System, Federal Deposit Insurance Corporation, Office 
of the Comptroller of the Currency, and Office of Thrift Supervision. 
We received written comments from these agencies, which are summarized 
below. Appendixes IV through VIII contains reprints of these letters. 
FTC provided technical comments, which we incorporated into this 
report, where appropriate. 

In their written comments, the federal banking regulators agreed with, 
or indicated that they were taking actions consistent with, our 
recommendation to strengthen oversight and enhance industry and 
consumer awareness of the types of marketing claims discussed in our 
report. Consistent with our recommendation, each of the regulators 
reported that they were working with other members of the Consumer 
Compliance Task Force of the Federal Financial Institutions Examination 
Council to develop supervisory guidance on reverse mortgages. In 
addition, each of the comment letters referred to other initiatives 
concerning reverse mortgages that the agencies had under way or had 
planned for the future. 

In its written comments, HUD did not specifically address our 
recommendations but noted that our draft report cited changes that HUD 
has undertaken to address many of the deficiencies in HECM counseling. 
HUD's letter also contained technical comments that we incorporated, as 
appropriate, in the body of the report. (See appendix VIII for a copy 
of HUD's letter.) We also provided draft sections of the counseling 
portion of this report to representatives from NFCC and MMI--two major 
counseling intermediaries--to obtain their viewpoints. 

NFCC conveyed to us its support of HUD's initiatives to improve and 
ensure the overall success of the HECM program. NFCC expressed its 
belief that the release of the new HECM counseling protocol, as well as 
HUD's recent revision of its counseling agency review checklist to 
include a section on HECM counseling, would address many of the issues 
highlighted in our report. In addition, NFCC indicated that HUD's plans 
to have counselors meet continuing education requirements and be 
reapproved every few years would afford greater consumer protections 
for HECM borrowers. However, consistent with our findings, NFCC also 
recommended that HUD provide additional guidance on defining what 
activities should be included in the counseling time reported on the 
HECM counseling certificate. NFCC also recommended that HUD require all 
counseling sessions to last at least 45 minutes, consistent with the 
requirements NFCC has established for its affiliated counseling 
agencies. 

MMI expressed to us its belief that the findings in our report, as well 
as HUD's planned independent observation of counseling sessions, will 
be useful to HUD in improving the effectiveness of its internal 
controls. MMI also commended HUD on its recent initiatives to improve 
the quality of the counseling program, specifically noting the 
development of a new counseling protocol and the revision of HUD's 
counseling agency review checklist to include a section on HECM 
counseling. In addition, MMI provided suggestions for strengthening 
HUD's oversight processes, specifying that HUD should more clearly 
define counseling session learning objectives and identify how key 
concepts may be addressed. While affirming the importance of covering 
alternatives to HECMs, as counselors are currently required to do, MMI 
also suggested that HUD consider what information might be best 
conveyed by an alternative source, such as by a local Area on Aging 
Office, at no cost to seniors. MMI also suggested that HUD review its 
counseling requirements for current relevance to the market place, for 
example, by considering whether cautions against new types of predatory 
practices are necessary. 

We are sending copies of this report to interested congressional 
parties, 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, and other parties. The report also will be 
available at no charge on the GAO Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-8678 or sciremj@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs are on the last 
page of this report. GAO staff who made major contributions to this 
report are listed in appendix IX. 

Signed by: 

Mathew J. Scirè: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report focuses on the Home Equity Conversion Mortgage (HECM) 
program, which insures reverse mortgages and is administered by the 
Department of Housing and Urban Development's (HUD) Federal Housing 
Administration. The objectives of this report were to examine (1) the 
potential benefits and costs of HECMs to borrowers, (2) federal agency 
responsibilities to protect consumers from misleading HECM marketing, 
(3) federal agency efforts to protect HECM borrowers from inappropriate 
cross-selling, and (4) HUD's oversight of HECM counseling providers. 

Benefits and Costs of HECMs: 

To identify the potential benefits and costs of HECMs to borrowers, we 
reviewed HUD regulation, guidance, and consumer materials related to 
the program. To more specifically identify borrower experiences with 
HECMs, we analyzed AARP's 2006 survey, which included HECM borrowers, 
and interviewed 18 borrowers selected at random from among the 
approximately 19,000 borrowers who obtained HECMs from fiscal years 
2001 through 2003. We selected borrowers from these years to ensure 
that borrowers had sufficient experience with the costs and benefits of 
their loans. For 16 of the 18 HECM borrowers, we also reviewed 
information about the terms of their loans from files that HUD provided 
to us. (HUD was not able to locate the other 2 files.) The results of 
our interviews cannot be generalized to all HECM borrowers. To obtain 
additional viewpoints on the benefits and costs of HECMs, including 
their risks, we interviewed representatives from HUD and the HUD Office 
of Inspector General; consumer advocates, including AARP, the National 
Consumer Law Center, and the National Council on Aging; and an industry 
group, the National Reverse Mortgage Lenders Association. To understand 
how borrower choices and economic conditions could affect the amount of 
home equity that a HECM borrower might have after 10 years, we 
constructed scenarios for a hypothetical HECM borrower illustrating 
changes in the borrower's loan balance, house value, and net equity 
under different circumstances. Using 2008 as our baseline year, we 
obtained information from HUD on the average age of HECM borrowers and 
the value of their homes. We used HUD HECM computer software to 
determine a HECM loan amount for a borrower with these characteristics. 
To illustrate how changing interest and house appreciation rates could 
affect the borrower's remaining home equity over time, we constructed 
several scenarios using different assumptions. For example, using data 
on historical 1-year Treasury yields and the Federal Housing Finance 
Agency's house price index, we determined the borrower's remaining home 
equity after 10 years if interest and house appreciation rate 
assumptions repeated the patterns seen from 1998 through 2007. In 
another scenario, we determined how much equity would remain for the 
same borrower if interest and house appreciation rates followed IHS 
Global Insight's projections for 2008 through 2017.[Footnote 53] We 
consulted with HUD to verify the accuracy of our calculations. 

To identify actions that federal agencies and others have taken to 
promote better consumer understanding of HECMs, we reviewed consumer 
guidance distributed by the Federal Trade Commission (FTC), federal 
banking regulators, HUD, the Financial Industry Regulatory Authority 
(FINRA), state agencies, and consumer groups. We also spoke with 
representatives of FTC and state and federal banking regulators about 
reverse mortgage task forces initiated by these agencies. 

Federal Agency Responsibilities for Protecting Consumers from 
Misleading HECM Marketing: 

To examine federal agency responsibilities to protect consumers from 
misleading HECM marketing, we identified authorities, standards, and 
processes that agencies use to identify and address misleading 
marketing practices. These agencies included HUD, FTC, and four federal 
banking regulators--the Board of Governors of the Federal Reserve 
System (Federal Reserve), the Office of the Comptroller of the 
Currency, the Office of Thrift Supervision, and the Federal Deposit 
Insurance Corporation. We also interviewed officials from these 
agencies and obtained information about complaints they received about 
reverse mortgages from calendar years 2005 through 2008. These four 
banking regulators oversee and examine at least 1 of the 12 largest 
HECM lenders, which we define as lenders that originated more than 
1,000 HECM loans in fiscal year 2008, based on HUD data.[Footnote 54] 
We also asked these regulators to provide information about any 
marketing violations found through compliance examinations. Finally, 
through the Conference of State Bank Supervisors, we sent a set of 
standardized questions to all of the state banking regulators, asking 
if they examine reverse mortgage marketing materials, have received any 
complaints about or come across any misleading reverse mortgage 
marketing materials, or have taken any actions against banks or other 
entities as a result of their reverse mortgage marketing. We received 
and reviewed responses from 35 states. 

In addition, to identify potentially misleading statements about the 
HECM program, we conducted a limited review of HECM marketing 
materials, including the following: 

* Internet materials for the 12 HECM lenders that originated at least 
1,000 HECMs in fiscal year 2008, and mailed material for 11 of these 12 
lenders.[Footnote 55] 

* Three DVDs from HECM lenders that advertised on television, including 
a DVD from 1 of the 12 lenders that we previously noted. 

* Internet material from 5 other HECM lenders. 

* Materials presented at seven HECM information seminars that GAO staff 
attended undercover from June 2008 through December 2008 in 4 states. 
More specifically, we attended seminars in Florida and California-- 
states with among the largest number of HECMs--and seminars in Maryland 
and Michigan, for the purposes of geographic diversity. 

We identified eight types of claims that were inaccurate, incomplete, 
or employed questionable sales tactics and reviewed the materials we 
gathered for statements implying the following: 

1. The borrower cannot owe more than the value of the home. 

2. The borrower cannot foreclose on a HECM or cannot lose the home. 

3. HECMs will not affect a federal benefit (e.g., Supplemental Security 
Income). 

4. Costs are the same as those for a forward mortgage, or all HECMs 
have the same costs. 

5. The borrower can access lifetime income or cannot outlive a reverse 
mortgage. 

6. A reverse mortgage is a government "benefit" or "entitlement" or any 
implication that the HECM is not a loan. 

7. Geographic or time limits for obtaining a reverse mortgage. 

8. Government affiliation through the use of government language and 
symbols. 

In total, we identified 26 entities that made one or more of these 
potentially misleading claims, and we asked officials at the Federal 
Reserve to identify the regulators for each of these entities. Because 
our review was of a limited number of advertisements, the results of 
our work cannot be used to ascertain the extent of potentially 
misleading HECM marketing. We also submitted examples of each 
potentially misleading claim to officials at HUD, FTC, and the banking 
regulators to obtain their viewpoints on these claims (based on the 
regulatory standards they would apply to HECM marketing materials they 
review). In addition, we submitted these claims to the president of the 
National Reverse Mortgage Lenders Association for his opinion on these 
marketing claims. 

Steps that Federal Agencies Have Taken to Protect Consumers from 
Inappropriate Cross-Selling: 

To examine the steps federal agencies have taken to protect consumers 
from inappropriate cross-selling, we reviewed HUD guidance and 
regulator actions to inform HECM borrowers about the costs and risks of 
purchasing annuities in conjunction with HECMs. We also reviewed the 
cross-selling provisions in the Housing and Economic Recovery Act of 
2008, and spoke with HUD officials about their planned implementation 
of these provisions.[Footnote 56] In addition, we spoke with 
representatives of the National Reverse Mortgage Lenders Association to 
obtain their perspectives on these cross-selling provisions. We spoke 
with officials at the National Association of Insurance Commissioners 
(NAIC) and obtained information on state insurance laws related to the 
sale of insurance products, such as annuities. Through NAIC, we sent 
standardized questions to all of the state insurance regulators, asking 
if the state tracked complaints, had received any complaints or had any 
cases of inappropriate cross-selling with reverse mortgages, or had 
taken any action against entities for cross-selling practices. We 
reviewed the 29 responses received, and obtained additional information 
from the 8 respondents that reported the cross-selling of unsuitable 
products with reverse mortgages. We also reviewed FINRA suitability 
standards for deferred annuities, and interviewed a FINRA 
representative about these standards. In addition, we spoke with an 
official at HUD's Office of Inspector General about investigations 
related to inappropriate cross-selling in conjunction with HECMs. 

HUD's Oversight of HECM Counseling Providers: 

To determine the steps HUD has taken to ensure compliance with HECM 
counseling requirements, we first identified the standards with which 
counselors and agencies must comply.[Footnote 57] We examined relevant 
statutes, regulations, the HUD's HECM counseling protocol, and 
mortgagee letters for applicable standards and discussed them with HUD 
officials.[Footnote 58] To understand how the provisions of the HECM 
protocol might apply, we interviewed HUD officials and representatives 
from the two national intermediaries--MMI and NFCC--that received HECM 
grant funding from fiscal years 2006 through 2008.[Footnote 59] We also 
reviewed their fiscal year 2008 grant agreements to more fully 
understand their counseling obligations. Our interviews with AARP 
officials provided additional perspective on the historical development 
of the HECM counseling program with which AARP has been involved. To 
better understand HECM counselor training requirements, we also 
attended HECM training courses sponsored by NeighborWorks® Training 
Institute.[Footnote 60] 

Second, we identified the range of internal controls that HUD uses to 
ensure compliance with HECM counseling requirements. As a basis for 
identifying activities that qualify as internal controls, we consulted 
GAO's Standards for Internal Control in the Federal Government. 
[Footnote 61] To identify the types of internal controls that HUD 
applies to the HECM counseling program, we interviewed HUD headquarters 
and field staff and obtained relevant documentation. HUD headquarters 
staff have responsibility for general oversight of the grant agreements 
with the national intermediaries, and HUD field staff are responsible 
for conducting on-site performance reviews of counseling agencies. We 
interviewed HUD field staff at all four HUD Home Ownership Centers 
(HOC), which are located in Atlanta, Georgia; Denver, Colorado; 
Philadelphia, Pennsylvania; and Santa Ana, California, about the 
procedures they use to evaluate counseling agency performance, and 
obtained relevant documentation. We also interviewed MMI and NFCC staff 
to identify what internal controls they have to maintain the quality of 
their HECM counseling. To better understand the nature of these 
performance evaluations, we reviewed performance reviews conducted by 
each HOC for counseling agencies, including those that conduct high 
numbers of HECM counseling sessions.[Footnote 62] 

Third, to determine whether HUD's internal controls provide reasonable 
assurance that counselors comply with HECM counseling requirements, GAO 
staff posing as potential HECM borrowers participated in 15 counseling 
sessions with 11 different counseling agencies during January and 
February 2009. For each session, the counselor sent our undercover 
counselee a signed counseling certificate that certified compliance 
with HUD requirements and recorded the length of the session. Because 
HUD estimated that about 90 percent of counseling takes place by 
telephone, we conducted the sessions by telephone. While our findings 
from the 15 counseling sessions cannot be generalized to all HECM 
counseling, the sessions allowed us to test compliance with HECM 
counseling requirements. For these sessions, which we recorded to 
facilitate our review of counselors' performance and the length of the 
calls, we determined whether counselors covered key topics, 
particularly those referenced on the counseling certificate. Our 
assessment primarily focused on whether counselors conveyed basic 
information on these topics, not whether they covered them 
exhaustively. We also compared the time each counselor recorded on the 
counseling certificate with (1) the actual length of the session and 
(2) the amount of time they spent specifically on counseling. 

These sessions took place with counseling agencies that provided some 
of the highest numbers of HECM counseling. Of the counselors we 
contacted: 

* 4 were employed by MMI, 

* 5 were employed by five different agencies affiliated with NFCC, and: 

* 6 were employed by five other agencies (three of these agencies also 
received HUD grant funding for HECM counseling). 

Since all of the counselors for our undercover sessions had been 
certified as HUD Network Counselors and passed the HECM examination, or 
were associated with MMI or NFCC, they were all required to comply with 
HUD's 2006 HECM counseling protocol. Accordingly, we also determined 
whether the counselors complied with selected elements of the protocol, 
such as sending information packages to counselees and discussing an 
estimated total annual loan cost disclosure. 

To evaluate how counselors might adapt their presentations on the basis 
of the unique situation of prospective borrowers, we created five 
different borrower profiles, including borrowers who intended to stay 
in their house indefinitely and those who intended to move within a few 
years. Each borrower profile included a set of predetermined responses 
to questions a counselee might be asked, such as home value, existing 
debt on home, and length of time the person planned to stay in the 
home. The undercover agents were instructed to indicate that they had 
little preexisting knowledge of reverse mortgages, to provide 
counselors with the opportunity to speak comprehensively about the 
program. 

We also evaluated selected aspects of the counselor's presentation, 
including the clarity of terminology, delivery (e.g., the rate of speed 
at which the counselors presented the information), and the use of 
visual aids (i.e., any information that counselors might have sent 
prior to the session). For this purpose, individuals from our Learning 
Center listened to the recordings of the sessions and independently 
evaluated the portion of the counseling sessions in which counselors 
presented information on HECM costs. See appendix III for more 
information on the Learning Center's evaluation. 

Finally, to test compliance with HUD's counselor referral requirements, 
GAO undercover staff who attended seven HECM information seminars 
(previously discussed) sponsored by HECM providers, asked for referrals 
to counseling agencies if the seminar presenters had not already 
provided them.[Footnote 63] We compared the number and type of 
referrals we received with HUD's requirements in effect at the time of 
our fieldwork.[Footnote 64] For example, we identified whether the list 
of referrals included at least five agencies that were located in the 
local area or state. The results of our work cannot be generalized to 
all HECM providers. In addition, we interviewed HUD officials 
responsible for developing the counselor referral requirements. 

We conducted this performance audit from April 2008 through June 2009, 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform our audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. Our investigative work was 
performed in accordance with standards prescribed by the Council of the 
Inspectors General on Integrity and Efficiency. 

[End of section] 

Appendix II: Copy of a Blank Certificate of HECM Counseling: 

Figure: Copy of a Blank Certificate of HECM Counseling: 

[Refer to PDF for image] 

Source: HUD. 

[End of section] 

Appendix III: Our Learning Center's Evaluation of Selected Information 
Presented during the Undercover Counseling Sessions: 

Given the potential challenges of conveying complex information to 
seniors by telephone, we undertook a limited assessment of the 
communication and presentation skills of the 15 counselors with whom we 
spoke. (See appendix I for more information about the counseling 
sessions.) This evaluation was conducted by staff in GAO's Learning 
Center with expertise in making oral presentations, who reviewed the 
recordings we made of the counseling sessions. Our analysis focused on 
the portion of each counseling session that explained HECM costs. We 
chose this portion because the subject matter can be complex and 
because all of the counselors explained costs to some degree, so this 
approach provided us with a basis for comparison. We found that most of 
the counselors--10 of 15--generally presented information in a manner 
that was reasonably clear and easy to follow, although many of the 
sessions might have been more effective if prospective borrowers had 
received reference materials beforehand.[Footnote 65] 

We assessed criteria in the following three categories: delivery of the 
presentation, clarity of information presented, and use of reference 
materials to convey technical content. 

* Delivery of the presentation: To assess each counselor's delivery, we 
evaluated rate of speech; whether the counselor varied intonation, 
pitch, and pace to sustain the listener's attention; and whether the 
counselor's speech had natural pauses, especially after an important 
point was made. We found that most (11 out of 15) generally did well in 
most dimensions of this category, although our evaluators felt that 2 
spoke too quickly, 1 spoke too slowly, and 6 of the counselors only 
sometimes incorporated natural pauses into their speech patterns, 
especially after an important point was made. Although our assessment 
did not factor in hearing impairments that are sometimes associated 
with senior citizens, academic research has shown that older adults 
have more difficulty than younger adults understanding information as 
speech rate increases. 

* Clarity of information presented: To assess the clarity of the 
presentations, we noted whether each counselor explained or defined 
cost-related concepts, terms, and principles when they were first 
introduced. We also evaluated the clarity of the counselor's 
explanations, and we noted whether the counselor tried to determine if 
the listener understood the subject matter, for example, by asking 
questions to confirm understanding or by responding if the listener 
asked questions, started to interrupt, or sounded confused. We found 
that most (11 out of 15) counselors generally did well in most 
dimensions of this category, although 5 counselors were less clear than 
the others with respect to explaining cost-related terms. 

* Use of reference materials to convey technical content: The HECM 
counseling protocol requires that counseling agencies give prospective 
borrowers the option to receive an information package on financial 
implications before or after the counseling session. As noted in the 
body of this report, only four counselors sent information packages 
with all the customized financial estimates, including the one 
counselor whose package contained all of the required information. Of 
these, only one counselor offered and sent the required information 
before the counseling session. For the 3 counseling sessions for which 
the information package came after the session, our evaluators agreed 
that for 2 of the sessions, it would have been easier to understand the 
presentation had they received the reference material beforehand. 
However, for the other session, the evaluators were uncertain if the 
presence of the reference materials would have helped, but then they 
also agreed that the counselor only "sometimes" explained or defined 
cost-related concepts and terms when they were first introduced. Our 
evaluators also agreed that for the 1 counseling session for which the 
reference material was available in advance, the presentation was easy 
to understand with the assistance of these reference materials. 

Although, according to HUD, about 90 percent of HECM counseling takes 
place by telephone, the HECM counseling protocol does not contain any 
specific procedures for telephone counseling. HUD officials indicated 
that HUD is considering developing such standards and is in discussion 
with one of their intermediaries. 

[End of section] 

Appendix IV: Comments from the Board of Governors of the Federal 
Reserve System: 

Board Of Governors Of The Federal Reserve System: 
Sandra F. Braunstein: 
Director: 
Division Of Consumer And Community Affairs: 
Washington, D.C. 20551: 

June 16, 2009: 

Mr. Mathew J. Scirè: 
Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street, N.W., #201: 
Washington, D.C. 20548: 

Dear Mr. Scirè: 

The Federal Reserve appreciates the opportunity to comment on the draft 
report entitled, "Reverse Mortgages: Product Complexity and Consumer 
Protection Issues Underscore Need for Improved Controls over Counseling 
for Borrowers," (GAO-09-606). We concur with the recommendation in the 
draft report that the Federal Reserve, along with other federal 
agencies[Footnote 66] involved with consumer protection for federally-
insured reverse mortgages, take steps to strengthen oversight and 
enhance industry and consumer awareness of the types of marketing 
claims discussed in the draft report. The report indicates these steps 
might include developing guidance through the Federal Financial 
Institutions Examination Council (FFIEC) to help bank examiners 
identify the types of marketing claims identified in the GAO report and 
incorporating discussion of these marketing claims in consumer 
education materials. In addition, the GAO asked each agency to review 
and follow-up on specific marketing material forwarded to it by the 
GAO. 

The Federal Reserve shares the concerns expressed by the GAO that 
reverse mortgages, while offering financial benefits to senior 
citizens, present risks to this vulnerable and growing population, due 
to the product's complexities. This response outlines initiatives we 
have underway to address these concerns. 

In 2008, the FFIEC's Task Force on Consumer Compliance established a 
working group to review reverse mortgage issues as they relate to the 
banking industry and to consumers. The working group is drafting 
proposed guidance to the industry on consumer protection concerns 
raised by reverse mortgage products. The draft guidance focuses on the 
need to provide adequate information to consumers about reverse 
mortgage products, to provide qualified independent counseling to 
consumers considering these products, and to establish policies, 
procedures, internal controls, and third party risk management as they 
relate to reverse mortgages. We anticipate publishing this guidance for 
public comment in the Federal Register in the coming months. 

This same interagency working group is enhancing examination procedures 
for use when reviewing an institution's compliance with consumer 
protection laws related to reverse mortgage products. Specifically, 
current interagency examination procedures for Regulation Z (Truth in 
Lending) address the regulatory requirements for reverse mortgages, 
focusing on the disclosure of total annual loan cost (TALC) rates for a 
reverse mortgage. The interagency working group is reviewing the 
current procedures to enhance examiner guidance relating to the 
accuracy of the TALC. The working group also will consider the GAO's 
recommendation to provide guidance to examiners when reviewing reverse 
mortgage marketing materials. The additional guidance is expected to be 
final by year-end 2009. 

To highlight our concerns to the public about reverse mortgages, 
Federal Reserve staff members have published articles in several 
Federal Reserve publications. Specifically, the Federal Reserve 
System's publication, Consumer Compliance Outlook, has recently had two 
articles on reverse mortgages. The third quarter 2008 issue had an 
article entitled, "Reverse Mortgages and Consumer Protection Issues." 
[Footnote 67] The first quarter 2009 issue included an article 
entitled, "Disclosure Requirements for Reverse Mortgages."[Footnote 68] 
Finally, in the publication, Partners (Issue #3, 2008), published by 
the Federal Reserve Bank of Atlanta,[Footnote 69] an article entitled 
"Reverse Mortgages Revisited" discussed consumer protection issues and 
reverse mortgages. 

In addition to its supervisory activities, the Federal Reserve Board 
has exclusive rulewriting authority for the Truth in Lending Act 
(TILA), which is implemented through the Board's Regulation Z (12 CFR 
226). As noted previously, Regulation Z requires a specific TALC 
disclosure for reverse mortgages. In its draft report, the GAO 
acknowledges the complexities of reverse mortgage products and notes 
that, for federally-insured reverse mortgages, a lender must certify 
that a borrower has participated in credit counseling that includes a 
discussion of the TALC. The GAO's study found that borrowers may not 
readily understand some of the costs of a reverse mortgage. In its 
rulewriting capacity, the Federal Reserve conducts regular reviews of 
its regulations, including Regulation Z. The GAO's findings will be 
considered as the Federal Reserve reviews Regulation Z to ensure the 
existence of strong consumer protections for reverse mortgages. As part 
of its review process for Regulation Z, the Board will conduct consumer 
testing to ensure that required disclosures provide consumers with 
meaningful information in a format that they can understand. 

The Federal Reserve has several venues by which it provides financial 
information to consumers. In developing this financial information, the 
Federal Reserve reviews data on the consumer complaints it receives in 
order to inform its consumer outreach programs. One venue for this 
outreach is the community affairs program at each of the twelve Federal 
Reserve Banks. The Reserve Banks conduct outreach throughout the 
country either directly to consumers or indirectly through community 
organizations. In addition, the Federal Reserve publishes informational 
material on a variety of topics, such as mortgages and credit cards, 
that is available on its website. In its continuing efforts to improve 
consumer education, the Federal Reserve will review GAO's findings for 
potential unmet opportunities and respond accordingly. 

Finally, we are carefully reviewing the reverse mortgage marketing 
materials from the two entities under our supervision that were 
forwarded to us by your office, and will take appropriate follow-up 
actions with the entities, as needed. 

Again, we appreciate the opportunity to review and comment on the draft 
report. We also appreciate the efforts and professionalism of the GAO's 
review team in conducting this study. 

Sincerely, 

Signed by: 

Sandra F. Braunstein: 
Director: 

[End of section] 

Appendix V: Comments from the Federal Deposit Insurance Corporation: 

FDIC: 
Federal Deposit Insurance Corporation: 
Division of Supervision and Consumer Protection: 
550 17th Street NW: 
Washington, DC 20429-9990: 

June 18, 2009: 

Mr. Richard J. Hillman, 
Managing Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, D.C. 20548: 

Dear Mr. Hillman: 

Thank you for the opportunity to review and comment on the Government 
Accountability Office's (GAO) report entitled, Reverse Mortgages - 
Product Complexity and Consumer Protection Issues Underscore Need for 
Improved Controls over Counseling for Borrowers (GAO-09-606). In this 
report, the GAO examined issues and federal activities related to: (1) 
the potential benefits and costs of Home Equity Conversion Mortgage 
(HECM) program loans to borrowers; (2) misleading HECM marketing; (3) 
the sale of potentially unsuitable products in conjunction with HECMs; 
and (4) oversight of HECM counseling providers. The GAO recommends the 
FDIC, Board of Governors of the Federal Reserve (FRB), Office of the 
Comptroller of the Currency (OCC) and the Office of Thrift Supervision 
(OTS) take steps, as appropriate, to strengthen oversight and enhance 
industry and consumer awareness of the types of marketing claims 
discussed in the report. The FDIC agrees with this recommendation. 

Currently, a Reverse Mortgage Working Group of the Federal Financial 
Institutions Examination Council's Consumer Compliance Task Force is 
drafting guidance for financial institutions to use in managing the 
consumer protection and other risks of reverse mortgage products to 
ensure compliance with requirements regarding disclosures and 
advertising, and to review potentially unfair or deceptive practices. 
This Working Group is comprised of representatives from the FDIC, OCC, 
FRB, OTS, National Credit Union Administration, and State Liaison. We 
will make certain that your findings and recommendations are considered 
in this guidance which we expect to finalize by June 30, 2010, or 
sooner. 

Also by June 30, 2010, the FDIC will publish in an FDIC Consumer News 
issue information about the potentially misleading claims in 
advertisements for reverse mortgages of the nature discussed in your 
report. The FDIC has issued industry and consumer awareness information 
on the complexities of reverse mortgages through our FDIC Consumer News 
and Supervisory Insights Journal in recent years. However we agree that 
more information should be made available specifically addressing 
advertisements for reverse mortgages. We are committed to providing 
that information to consumers in our publications. 

We appreciate the opportunity to comment on your review and your 
suggestions on how the FDIC may enhance our industry oversight and 
consumer outreach on reverse mortgages. 

Sincerely, 

Signed by: 

Sandra L. Thompson: 
Director: 

[End of section] 

Appendix VI: Comments from the Office of the Comptroller of the 
Currency: 

Comptroller of the Currency: 
Administrator of National Banks: 
Washington, DC 20219: 

June 19, 2009: 

Mr. Mathew J. Scirè: 
Director, Financial Markets and Community Investment: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Scirè: 

We have received and reviewed your draft report titled "Reverse 
Mortgages: Product Complexity and Consumer Protection Issues Underscore 
Need for Improved Controls over Counseling for Borrowers." Your report 
responds to a Congressional request for information concerning the 
benefits and costs of home equity conversion mortgages (HECM) to 
borrowers. 

You found that: (1) the potential benefits and costs can be varied and 
complex and may not be fully understood by consumers; (2) some 
advertisements contain potentially misleading claims; (3) borrowers may 
be vulnerable to the cross-selling of unsuitable products; and (4) 
counseling agencies may not be complying with requirements. 

You recommended that several federal agencies, including the Office of 
the Comptroller of the Currency (OCC), take steps to strengthen 
oversight and enhance industry and consumer awareness of the types of 
marketing claims discussed in your report. 

We agree that there is more we should be doing today to address the 
risks to consumers of reverse mortgages. The OCC has been working with 
the other federal bank regulatory agencies and state representatives on 
the Federal Financial Institutions Examination Council to develop 
supervisory guidance on reverse mortgages. The interagency guidance is 
still very much a "work in progress," but it will be a very important 
first step in directing banks to apply to proprietary reverse mortgages 
the same types of consumer protection standards applicable to HECMs, 
including the requirement for independent counseling. Effective 
implementation of the standards in the guidance through our supervisory 
process will be critical to protecting reverse mortgage borrowers. 

We already have regulations in place that we will use in our 
supervision of reverse mortgage lending by national banks to supplement 
our implementation of the interagency guidance in addressing two 
particular consumer protection risks. The first is misleading 
marketing. National banks are subject to a requirement in OCC 
regulations that prohibits engaging in unfair or deceptive practices, 
as those teens are defined in the FTC Act, in connection with making,
arranging, purchasing, or selling a real estate loan. We will use this 
authority to require immediate correction of any potentially misleading 
marketing claims by a bank in connection with reverse mortgage 
products. In the case of the specific advertisements you provided us 
for review and followup, we found that the national banks had revised 
their materials, as necessary, to accurately reflect the features of 
their products. 

In addition, banks are prohibited by law from conditioning availability 
of a reverse mortgage on the borrower's purchase of certain nonbanking 
products. We can and will use this authority to take action to prevent 
any inappropriate and illegal cross-selling activities. And, we would 
expect national banks to have compensation policies that do not create 
inappropriate incentives for loan officers and third parties. 

Should we conclude that implementation of the interagency guidance and 
enforcement of existing regulations is not sufficient to address all of 
the consumer protection concerns that may arise in connection with 
reverse mortgages, the OCC is prepared to adopt more definitive 
regulatory standards. We also look forward to working with the 
Department of Housing and Urban Development as it develops options to 
enhance protections available under its federally insured HECM program. 

We appreciate the opportunity to comment on the draft report. 

Sincerely, 

Signed by: 

John C. Dugan: 
Comptroller of the Currency: 

[End of section] 

[End of section] 

Appendix VII: Comments from the Office of Thrift Supervision: 

Office of Thrift Supervision: 
Department of the Treasury: 
Timothy T. Ward: 
Deputy Director, Examinations Supervision, and Consumer Protection: 
1700 G Street N.W. 
Washington, DC 20552: 
(202) 906-5666: 

Mathew J. Scirè: 
Director, Financial Markets and Community Investment: 
Government Accountability Office: 
441 G St., NW: 
Washington, DC 20548: 

Subject: Government Accountability Office (GAO) Reverse Mortgage Draft 
Report 09-606: "Reverse Mortgages: Product Complexity and Consumer 
Protection Issues Underscore Need for Improved Controls over Counseling 
for Borrowers" 

Office of Thrift Supervision (OTS) Comments: 

Dear Mr. Scirè: 

Thank you for the opportunity to review Draft Report 09-606, which 
discusses a number of issues that arise when reverse mortgages are 
offered. Because the senior citizens who obtain these complicated 
products may be vulnerable to misleading marketing techniques, we share 
the concerns that prompted GAO to undertake this study. 

GAO's Draft Report 09-606 recommends that the federal banking 
regulators consider whether reverse mortgage advertisements are 
potentially misleading in describing the costs and benefits of Home 
Equity Conversion Mortgage loans. GAO also recommends that OTS, along 
with other agencies, take steps to strengthen oversight and enhance 
consumer awareness of the types of marketing claims contained in the 
report. Draft Report 09-606 suggests that these steps might include 
developing examination guidance and consumer education materials. 

Consistent with these recommendations, OTS is working with the other 
members of the Federal Financial Institutions Examination Council 
(FFIEC) Consumer Compliance '''ask Force to develop guidance on the 
origination of reverse mortgages. In addition, OTS has already 
published material intended to educate consumers about reverse 
mortgages[Footnote 70] and is working with the other FFIEC agencies to 
update the procedures used by examiners to evaluate how institutions 
are calculating and disclosing the cost of reverse mortgages under the 
Truth in Lending Act. 

Draft Report 09-606 also notes that the GAO referred certain 
advertisements that made potentially deceptive claims to the 
appropriate federal banking regulators for review. As it is now 
written, Draft Report 09-606 suggests that OTS is among these 
regulators.[Footnote 71] While OTS staff did review certain 
advertisements, it does not appear that any of these samples were used 
by an institution currently under OTS supervision. Should OTS find that 
any institution under its jurisdiction is making use of misleading or 
deceptive advertising in the future, we will take appropriate action. 

Please contact Montrice G. Yakimov. OTS Managing Director for 
Compliance and Consumer Protection at (202) 906-6173 or 
Montrice.Yakimov@ots.treas.gov if you have any questions or comments on 
this response. 

Sincerely, 

Signed by: 

Timothy T. Ward: 
Deputy Director: 

[End of section] 

Appendix VIII: Comments from the Department of Housing and Urban 
Development: 

U.S. Department Of Housing And Urban Development: 
Assistant Secretary for Housing-Federal Housing Commissioner: 
Washington, DC 20410-5000: 
[hyperlink, http://www.hud.gov]	 

June 17, 2009: 

Mr. Mathew J. Scirè, Director: 
Financial Markets and Community Investment: 
441 G St., NW: 
Washington, D.C. 20548: 

Subject: GAO Draft Audit Report: Reverse Mortgages Report No.: GAO-09-
606 Report Issue Date: June 2009: 

Dear Mr. Scirè: 

This is in response to subject Draft audit report of the Reverse 
Mortgage Program (HECM) performed by the Government Accountability 
Office (GAO). The Draft report indicates the audit was performed to 
determine: 1) the potential benefits and costs of HECMs to borrowers; 
2) the extent and impact of misleading HECM marketing; 3) the sale of 
potentially unsuitable products in conjunction with HECMs, and 4) 
oversight of HECM counseling providers. GAO determined during its 
review of HUD's role and responsibilities with respect to HECM 
mortgages that the Department's internal controls do not provide 
reasonable assurance that counseling providers are complying with HECM 
counseling requirements. 

The Office of Housing (Housing) reviewed the Draft audit report and 
determined that while GAO noted deficiencies with respect to HUD's 
oversight of HECM mortgages, the report includes proactive changes HUD 
has taken to address many of the deficiencies. For example, GAO noted 
that HUD's internal controls over the HECM counseling process needs to 
be improved. Notwithstanding this issue, the Draft indicates that GAO 
takes into consideration HUD's efforts to conduct surveys of HECM 
counseling. The Draft also indicates that GAO acknowledges HUD's 
development of a project in collaboration with the AARP Foundation to 
independently observe HECM counseling sessions. 

The Office of Housing appreciates the opportunity to provide a written 
response to the findings noted in the Draft and submits the following 
comments to be considered by GAO. 

GAO's Determination: 

Page 10 in the Draft implies that there is potential growth in the 
amount of funds available to borrowers over time should the mortgagor 
exercise the line of credit option. 

Housing's Response: 

During the exit conference with GAO, Housing stated and would like to 
reiterate that the "growth" that occurs is not limited to the line of 
the credit option but also occurs with any of the payment plans. 
Housing recommends that GAO clarify its statement regarding this matter 
in the final report. 

GAO's Determination: 

Page 11 in the Draft states the upfront insurance premium (UFMIP) and 
origination fees associated with HECMs can be substantial. 

Housing's Response: 

Housing disagrees with OIG's determination. The Draft does not indicate 
that the stated costs were substantial when compared to costs 
associated with another similar mortgage product such as forward 
mortgages. Therefore, the statement is inadequate without a baseline 
that shows a comparison to a similar mortgage product was made. For 
example, the UFMIP, for a HECM is 2.0 percent compared to 1.75 percent 
for forward mortgages. Housing concludes that the .25 percent 
difference is not substantial. In addition, the annual premium for a 
HECM mortgage is .50 percent compared to .55 percent charged on forward 
mortgages. Lastly, origination costs on forward mortgages are 
approximately 3% excluding pre-paid items and UFMIP, and falls within 
the same range for HECM mortgages. 

GAO's Determination: 

Page 16 in the Draft states a report written by the Office of Inspector 
General (OIG) indicates that 12 borrowers interviewed during an audit 
did not understand the fees or interest costs of their HECM loan. 

Housing's Response: 

Housing does not agree that a reference to OIG's report is appropriate. 
The 12 borrowers OIG interviewed may have had an unrelated issue with 
the originating lender and therefore are not representative of the HECM 
borrower population as a whole. Also, OIG's targeting is generally 
based on adverse selection; therefore, their findings may not be 
representative of the vast majority. 

GAO's Determination: 

Pages 31-32 in the Draft indicates a HUD official expressed concern 
about the Department's "capacity" and "authority" to enforce HERA no 
cross-selling provisions. 

Housing's Response: 

During the exit conference with GAO, Housing stated and would like to 
reiterate that the Department is not questioning its capacity and 
authority to address noncompliance with HUD/FHA requirements. HUD/FHA 
through its MRB process has and does exercise the authority to sanction 
any FHA approved lender that egregiously violates the Department's loan 
origination requirements. Also, it should be noted that insurance sales 
are regulated at the state level. HUD does not have jurisdiction over 
these activities. Housing requests that GAO clarify the distinction 
between HUD's oversight and the state's role. 

GAO's Determination: 

Page 50 in the Draft is written in such a way that it appears GAO has 
misinterpreted the numbers of counseling agencies that are supposed to 
be on the list both previously and in accordance with the new Mortgagee 
Letter 2009-10. GAO reports that at the time of the audit, lenders were 
required to provide borrowers with a list that includes six entities 
located within the local state area that perform HECM counseling 
including one agency located within reasonable driving distance to meet 
HUD/FHA face-to-face requirements. GAO further reported that in March 
2009, HUD increased the number of references from 6 to 10. 

Housing's Response: 

Housing takes exception to GAO's interpretation of HUD's requirements. 
Prior policy required lenders to provide potential HECM borrowers with 
the contact information for 5 counseling agencies in the local area or 
state with one of those agencies located within reasonable driving 
distance. The list was to also include contact information for three 
intermediaries that provided telephone counseling. The intermediaries 
were MMI, NFCC and AARP. ML 2009-10 increased the number of 
intermediaries to five; CCCS of Greater Atlanta and NCOA were added to 
the list. The total number of counseling agencies required to be on the 
list in accordance with ML 2009-10 is now ten and consists of five 
local agencies and five intermediaries. Housing requests that GAO 
correct or remove its statement regarding this matter. 

If you have any questions regarding this matter, please feel free to 
contact Mrs. Ruth Roman, Director, of HUD's Program Support Division at 
202-402-2112. 

Sincerely, 

Signed by: 

Brian D. Montgomery: 
Assistant Secretary for Housing-Federal Housing Commissioner: 

[End of section] 

Appendix IX: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Mathew J. Scirè, Director, 202-512-8678 or sciremj@gao.gov: 

Staff Acknowledgments: 

In addition to the contact above, Steven K. Westley (Assistant 
Director), Sonja J. Bensen, Christine A. Hodakievic, John T. McGrail, 
Marc W. Molino, Carl Ramirez, Barbara M. Roesmann, Jennifer W. 
Schwartz, Winnie Tsen, and James D. Vitarello made key contributions to 
this report. In addition, members of the GAO Learning Center 
contributed to this report, including Ann M. Commeree, Chris Dionis, 
Linda S. Garcia, and Carol E. Willett. 

[End of section] 

Footnotes: 

[1] 12 U.S.C. § 1715z-20 (a). 

[2] About 10 percent of these lenders originated 80 percent of all 
HECMs in 2008. 

[3] HERA also mandated that GAO conduct a study on the cost and 
availability of HECMs under the new provisions established in the act. 
We plan to issue this report in July 2009. 

[4] These conditions are also known as mortgage covenants. 

[5] Previously, FHA loan limits were generally set at 95 percent of the 
local area median house price. HERA established for the first time a 
national limit for HECMs, which was set at $417,000. As a result of the 
American Recovery and Reinvestment Act of 2009, the national limit was 
raised again to $625,500. 

[6] The AARP Foundation is AARP's affiliated charity. 

[7] See AARP, Reverse Mortgages: Niche Product or Mainstream Solution? 
Report on the 2006 AARP National Survey of Reverse Mortgage Shoppers 
(Washington, D.C.: December 2007). The national telephone survey 
portion of this study, which consisted of interviews with 1,509 
individuals who completed reverse mortgage counseling between 2001 and 
2006, was conducted in December 2006. We reviewed the methodology of 
this survey and concluded that the results were usable for the purposes 
of our report. 

[8] National Council on Aging, Use Your Home to Stay at Home: Expanding 
the Use of Reverse Mortgages for Long-Term Care: A Blueprint for Action 
(Washington, D.C.: January 2005). 

[9] The $6,000 maximum origination cap was the result of HERA. Before 
this, the origination fee was 2 percent of the maximum claim amount 
without a cap. 

[10] For these scenarios, we used the average characteristics of a HECM 
borrower in fiscal year 2008. HUD data indicate that the average HECM 
borrower in fiscal year 2008 was aged 73, with a home valued at 
$239,357. According to HUD, the average HECM borrower draws down 58.3 
percent of the loan up front, with subsequent draw downs ranging from 3 
to 6 percent. 

[11] For economic forecasts of house appreciation and interest rates, 
we used IHS Global Insight's 2008 through 2017 projections for the 
Federal Housing Finance Agency house price index and the 1-year 
Treasury yield, respectively. These projections were current as of 
October 2008 and are used here for illustrative purposes only. IHS 
Global Insight is a private company that forecasts a wide range of 
financial and economic indicators, including interest rates and house 
appreciation rates. 

[12] For historical house appreciation and interest rates, we used 1998 
through 2007 data on the Federal Housing Finance Agency house price 
index and the 1-year Treasury yield, respectively. 

[13] We did not speak with officials at NCUA because none of the HECM 
lenders that originated at least 1,000 HECMs in fiscal year 2008 were 
credit unions regulated by NCUA. 

[14] See OTS Advertising Rule at 12 CFR 563.27. 

[15] State banking regulators are not required to follow the reverse 
mortgage guidelines when conducting compliance examinations, but these 
regulators can use these guidelines for determining whether reverse 
mortgage lenders are operating in an appropriate manner. 

[16] HUD's Mortgagee Review Board, an enforcement body chaired by HUD's 
Assistant Secretary for Housing-Federal Housing Commissioner, can 
impose administrative sanctions against lenders, including withdrawing 
the lenders' authority to make FHA-insured loans. 

[17] See 18 U.S.C. §§ 709 (false advertising or misuse of names to 
indicate Federal agency), 1017 (government seals wrongfully used). 

[18] We requested but did not receive materials from 1 of these 12 
lenders. 

[19] It was not always clear from the marketing materials whether the 
entities were lenders, mortgage brokers, or third-party marketers. 

[20] At least 1 of these lenders has corrected its potentially 
misleading claim since we first reviewed the materials, and another 
lender was issued a cease-and-desist order by a state banking regulator 
as a result of a misleading claim. 

[21] These rules state that members shall not engage in "conduct 
involving dishonesty, fraud, deceit or misrepresentation, or knowingly 
making a material false or misleading statement to consumers or 
others," and requires members to "accurately describe both the costs 
and benefits of the products and services presented to consumers." 
According to NRMLA's president, the association does not conduct 
systematic reviews of marketing materials. However, NRMLA has asked 
members to remove or correct misleading marketing claims; suspended 
lenders' membership for a specified period as a result of misleading 
marketing claims; and, in one instance, withdrew a lender's membership 
because of its marketing practices. 

[22] The Federal Reserve did not comment on the advertisements 
individually, but indicated that the advertisements generally raised 
concerns. 

[23] The claim that did not raise as much concern stated that HECM 
closing costs average only 1 percent more than a regular FHA mortgage. 
We considered this statement to be inaccurate because while HECM 
origination fees are 2 percent, FHA forward mortgage origination fees 
are 1 percent--a difference of 100 percent. The officials with whom we 
spoke about this claim said they would consider this an "editorial 
error" or "confusing," but not intended to mislead. This is because 
origination fees and interest rates are commonly quoted as a percentage 
of the loan amount, and the claim would not necessarily be misleading 
when interpreted in this light. In addition, we found examples of 
claims that HECMs do not affect Supplemental Security Income (SSI). 
This claim is inaccurate because eligibility for SSI could be affected 
if a borrower's savings from HECM funds were to exceed SSI's monthly 
limits. However, because there were few examples of this type of claim, 
we did not submit it to the officials for review. 

[24] See Reverse Mortgages: Niche Product or Mainstream Solution? 

[25] Banks and savings associations that offer insurance and annuities 
are prohibited from engaging in practices that would cause a reasonable 
consumer to believe that an extension of credit, including a HECM, is 
conditioned on the purchase of insurance or an annuity from the 
creditor. See Consumer Protection in Sales of Insurance Rules, 12 CFR 
§§14.30, 208.83, 343.30, and 536.30. 

[26] The TALC is expressed as a percentage--the estimated total dollar 
cost of a reverse mortgage, annualized into a rate, roughly comparable 
to the annual percentage rate in a forward mortgage. As up-front costs 
are spread over more years, the TALC rate declines. 

[27] Office of Compliance Inspections and Examinations, Securities and 
Exchange Commission; North American Securities Administrators 
Association; and Financial Industry Regulatory Authority, Protecting 
Senior Investors: Report of Examinations of Securities Firms Providing 
"Free Lunch" Sales Seminars (Washington, D.C., September 2007). 

[28] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). Control activities include 
establishing and reviewing performance measures, monitoring activities, 
training to develop employee skills, and accurately recording 
transactions and events. 

[29] A national intermediary is an organization that operates in 
multiple regions of the United States and provides counseling services 
through its branches or affiliates. In contrast, a HUD local counseling 
agency may have a main office, and one or more branch offices, in no 
more than two contiguous states. 

[30] HUD indicated that these numbers were only estimates because of 
the way it currently collects such data. 

[31] Consistent with this estimate, MMI representatives estimated that 
90 percent of their HECM counseling took place by telephone, and NFCC 
representatives estimated about 80 percent. 

[32] HUD Mortgagee Letter 2004-25 states that housing counseling 
agencies are not permitted to promote, represent, or recommend lenders 
or to speak on behalf of lenders. 

[33] See Reverse Mortgages: Niche Product or Mainstream Solution?. The 
study's authors compared the results of two surveys, both of which 
suggested counselors were omitting a discussion of options. In response 
to the 2006 survey, about 30 percent of counseling clients who had 
received counseling between 2001 and 2006 reported that their 
counselors had discussed alternatives to a reverse mortgage. In 
contrast, 60 percent of clients who responded to earlier surveys that 
AARP administered more immediately to all participants after the 
counseling session said counselors discussed other options. Also, see 
HUD, Office of Inspector General, Audit Report from the Regional 
Inspector General for Audit, Fort Worth Region: 2008-FW-1010 (Fort 
Worth: July 14, 2008). On the basis of interviews with 12 borrowers and 
a review of their loan files, the report concluded that counselors had 
not fully informed 9 of the 12 borrowers about financing options, other 
than a HECM, and about the costs of those options. 

[34] For example, according to an AARP Foundation consumer education 
booklet on reverse mortgages, many local and some state government 
agencies offer deferred payment loans for repairing or improving a 
home, with no repayment as long as the person lives in his or her home. 
In addition, some state and local government agencies offer property 
tax deferral loans that provide annual loan advances that can be used 
only to pay property taxes. 

[35] As indicated in Mortgagee Letter 2004-25, to meet this 
requirement, a counselor must cover, at a minimum, (1) the advantages 
and disadvantages of each payment plan; (2) how a borrower's principal 
limit is determined, including all loan costs and set-asides; (3) the 
increase in the loan balance and likely decrease of the borrower's 
equity over time; (4) the growth of the HECM line of credit; and (5) 
the borrower's ongoing responsibility to pay property taxes and hazard 
insurance, either directly or indirectly by electing to require the 
mortgagee to withhold funds from monthly payments or to charge such 
funds to a line of credit. Furthermore, a counselor should use computer 
printouts generated by HUD's computer software, or similar software, 
for calculating the maximum amount of funds available to HECM borrowers 
and for each payment plan option. As of March 27, 2009, HUD more 
specifically required that the counselor document a client's budget on 
the basis of the person's income, assets, debts, and monthly expenses. 

[36] If the value of a person's countable resources exceeds the Social 
Security Administration's (SSA) allowable limit at the beginning of a 
month, the person cannot receive SSI for that month. The limit for 
countable resources is $2,000 for an individual and $3,000 for a 
couple. SSA does not consider the home a person lives in and the land 
upon which it stands as countable resources. 

[37] HUD implemented this requirement in Mortgagee Letter 99-2, 
pursuant to a 1998 amendment to the National Housing Act. 

[38] See 72 Fed. Reg. 870 HECM Counseling Standardization and Roster; 
Proposed Rule (Jan. 8, 2007). 

[39] As described in HUD's Fiscal Year 2008 Notice of Funding 
Availability for Discretionary Programs, the rating factor that 
addresses the quality and effectiveness of the applicant's historical 
and proposed housing activities is scored partly on the degree to which 
the applicant demonstrates, as compared with other applicants, that 
sufficient time and resources were devoted to ensuring quality 
counseling. HUD officials explained that HUD uses this information 
across the various counseling services to better understand the level 
of effort in order to award grants in a fair manner. 

[40] Reverse Mortgages: Niche Product or Mainstream Solution?. 

[41] HUD issued these instructions in Mortgagee Letter 2008-12 pursuant 
to regulations published in 2007 (see 72 Fed. Reg. 55638) and codified 
at 24 C.F.R. Part 214. The instructions state that if an agency's cost 
of providing HECM counseling is less than $125, the maximum amount the 
agency can charge the client is the actual cost. 

[42] In Mortgagee Letter 2008-28, HUD precluded lenders from paying HUD-
approved counseling agencies for HECM counseling services in response 
to a provision in HERA. 

[43] While 1 of our undercover counselees was not charged for a 
session, the counselor clearly stated that there would be a charge, 
even though the agency's recorded message indicated that HECM 
counseling was free. 

[44] HECM Counseling Protocol, HUD National HECM Counseling Network, 
December, 2006. The 2006 protocol is essentially identical to a 2005 
counseling protocol developed by AARP. MMI and NFCC officials told us 
that their counselors follow the 2005 AARP protocol and the 2006 HUD 
protocol, respectively. 

[45] These regulations will be promulgated pursuant to the statute, 
which requires that HECM counseling be provided by counselors who meet 
qualification standards and follow uniform counseling protocols that 
HUD must establish within 12 months of July 30, 2008. See 12 U.S.C. 
§1715z-20(f). 

[46] The way in which most of the counseling agencies scheduled the 
counseling sessions may have complicated their ability to comply with 
the requirement. More specifically, most agencies used noncounseling 
staff to schedule the sessions, but HUD policy prohibits such staff 
from obtaining the type of information from clients that is needed to 
prepare beforehand a customized information package with financial 
information. 

[47] This is the only condition under which HUD HECM counselors must 
discuss annuities. In comparison with the requirement to discuss the 
unnecessary fees that might be charged by estate planners, HUD decided 
not to require counselors to address potential borrower misconceptions 
that they might have to pay for annuities to obtain a HECM (see 64 Fed. 
Reg. 2984, Jan. 19, 1999). 

[48] Our undercover counselees adopted one of several different 
financial scenarios for each session. One of the scenarios involved the 
potential purchase of an annuity. 

[49] HUD officials subsequently told us that they informed lenders of 
an additional requirement during training sessions. Specifically, 
lenders were instructed to add the toll-free telephone numbers for NFCC 
and MMI to the required list of agencies. 

[50] Mortgagee Letter 2009-10 explicitly expanded the number of 
telephone counseling agencies that lender's must provide to prospective 
borrowers. The list must now include 5 such agencies. 

[51] Audit Report from the Regional Inspector General for Audit. The 
Regional Inspector General found that the loan originator's practice of 
contracting with one counseling service to assign a counselor to the 
borrower did not meet HUD's requirement that the originator provide a 
list of eligible counselors. 

[52] One of the seminar sponsors was an estate planning firm to whom 
this requirement did not apply. 

[53] IHS Global Insight is a company that forecasts a wide range of 
financial and economic indicators, including interest rates and house 
appreciation rates. 

[54] We did not obtain data or interview officials from the National 
Credit Union Administration because this regulator does not oversee any 
of the top HECM lenders. 

[55] We requested but did not receive mailed material from 1 of these 
12 lenders. 

[56] According to the provisions of the act, a borrower cannot be 
required by the lender or any other party to purchase an insurance, 
annuity, or similar product as a condition of obtaining a HECM. In 
addition, the lender either must not be associated with any other 
financial or insurance product or must maintain firewalls and other 
safeguards to ensure that its employees originating the HECMs do not 
also sell other financial or insurance products. 

[57] Since the inception of the HECM program, HECM borrowers must 
receive information about the financial implications of HECMs, allowing 
consumers to make an informed decision about taking out a HECM. In 
response, HUD developed a counseling program, working with nonprofits, 
such as the AARP Foundation, to develop a network of qualified 
counselors. Counselors may conduct counseling face-to-face or by 
telephone. 

[58] HECM Counseling Protocol, HUD National HECM Counseling Network, 
December, 2006. 

[59] HUD Network Counselors and counselors employed by the national 
intermediaries must comply with the provisions of a uniform counseling 
protocol. 

[60] NeighborWorks® America is a national nonprofit organization 
created by Congress to provide financial support, technical assistance, 
and training for community-based revitalization efforts. The course 
materials were sponsored in part through a grant from HUD. 

[61] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00.2.1.3.1] 
(Washington, D.C.: November 1999). 

[62] HUD staff indicated that these numbers were only estimates because 
of the way it currently collects such data. 

[63] In one case, we were unable to reach the seminar sponsor at the 
provided phone numbers when we attempted to follow up by phone. 

[64] HUD established the counselor referral requirements in effect at 
the time of our fieldwork in December 2004. As discussed in the body of 
this report, HUD expanded these requirements in March 2009. 

[65] Ten of the counselors did well in both areas of assessment-- 
delivery of presentation and clarity of information presented, but two 
other counselors did well in one area of assessment, but not the other. 

[66] The U.S. Department of Housing and Urban Development, the Federal 
Trade Commission, the Federal Deposit Insurance Corporation (FDIC), the 
Office of the Comptroller of the Currency (OCC), and the Office of 
Thrift Supervision (OTS). 

[67] [hyperlink, http://www.philadelphiafed.org/bank-
resources/publications/consumer-compliance-
outlook/2008/thirdquarter/q3_Ol.cfm] 

[68] [hyperlink, http://www.philadelphiafed.org/bank-
resources/publications/consumer-compliance-
outlook/2009/firstquarter/ql_03.cfm] 

[69] [hyperlink, http://www.frbatlanta.org/invoke.cfm?objectid=844CE47E-
5056-9F121236D9E3BC8947D7&method=display_body] 

[70] See "Reverse Mortgages: Information to Consider on Benefits and 
Risks," Community Liaison, Community Affairs Newsletter Volume No. 
2008, Issue I (Winter 2008). 

[71] See Draft Report 09-606 at pages 28 and 53-54. 

[End of section] 

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