Your Mother was Right: Ethical Issues in Reverse Mortgage Lending

Consider for a moment the following ethical scenarios and how you would respond.

A 92-year-old woman needs cash for property taxes and homeowners insurance. As a last resort, she applies for a reverse mortgage, but her 50-year-old, live-in son prevents her from speaking with you. She loses her home and ends up nesting in an apartment with her son.

A doting son-in-law escorts his mother-in-law into your office. He turns out to be a financial planner and annuity salesman, who advises his mother-in-law to get a reverse mortgage to purchase a lump-sum, cash advance plan.

An eager son leads his 75-year-old mother to your shop to get a reverse mortgage, but the mother doesn’t seem too enthusiastic.

One product option pays your company an additional one percent premium based on the amount of the customer’s initial draw. Other products pay no premiums, but they offer customers more money at reduced overall costs. Because the HECM counselor is not aware of the availability of lower-priced HECMs, your customer doesn’t know either.

Your long-time HECM customer desperately needs to raise additional cash through a refinance. Your analysis shows she will pay $10,000 to get $30,000. In each of these situations, what would you do?

Placing the needs of the borrower ahead of your own is central to the NRMLA identity.

The Anxious Advisor
In the first situation, an anxious son seemed to want the reverse mortgage loan more than his mother.

The son could be a passionate advocate of reverse mortgages, or he could have twisted motives. Arrange to be alone with the customer and probe her need for the loan, to make sure she is under no outside pressure.

How do you get to be alone with your customer? Ask your customer to call you when she gets home, tell her you want to talk with her alone, find out the existence of other relatives that can act as a check on the potentially abusive son or daughter. Your goal is to ensure your customer is getting the loan for her own benefit.

Another resource is the counselor. A disinterested third-party, the counselor can call the customer to find out whether a family member is coercing her. This is an example of how good communication between a lender and a counselor can help the senior.

In the next example, the doting son-in-law could be a caregiver who wants to get paid for legitimate services rendered. Or, as a panelist discovered, he could be an annuity peddler who wants his kids’ grandmother to get her cash in a lump sum. Sadly for the annuity rep, his mother-in-law learned about other options during the loan process and scuttled the lump-sum idea.

Adult Protective Services
Most cities or towns have agencies charged with protecting older adults from abuse. You should know the Adult Protective Service (APS) agencies in the communities where you originate reverse mortgages, and you should consult with them when you feel a senior is in an abusive condition.

APS should have been called to protect the 92-year-old lady from her son, who, ironically, lost his inheritance because he prevented his mother from getting a reverse mortgage.

Refinance Value is in the Eye of the Customer
Imagine a repeat customer who wants a refinance where costs outstripped benefits. Borrower benefits should always outweigh costs to justify a refinance, but some customers might just defy a loan originator’s advice and proceed to do a more costly refinance with a less scrupulous lender down the street.

In such a situation, you should accommodate your customer’s request by cutting your fees to keep her from going elsewhere to do a more expensive refinance.

A customer’s benefit, not a lender’s need for fees, should drive a refinance. But imagine a refinance scenario which defies clear-cut answers.

For example, a couple with a small manufactured home comes to you looking for a reverse mortgage. An analysis shows they would pay $10,000 in closing costs to get about $9,000 net. Based on the numbers, you may rightly counsel them against going through with the loan. The next day, the social worker who had referred the couple to you calls and gives you a severe tongue-lashing.

Unknown to you, the couple was in dire medical and financial straits, and cash from a reverse mortgage was their last resort. They had terminal medical conditions. They couldn’t pay for their medicines, their food, or their heat. Although you acted ethically and professionally, you, from the social worker’s perspective, was “denying” the couple their “last hope.”

The moral of these stories is that the value of a refinance is in the eye of the customer. As an originator in such circumstances, your job is to listen to your customer, validate their needs, run the numbers, and get out of their way. Ultimately, the decision to refinance is theirs, not yours.

Annuities Everywhere
Another scenario involves annuities. The annuity is separate from the reverse mortgage transaction, but your customer told you that she is considering buying one of those ubiquitous insurance contracts. There is no thirsty son-in-law in sight, just you and your customer. How would you handle it? What would you say? What would you do?

You should make sure your customer knows what an annuity is; you should disclose that you are not an annuity expert, and you should ask her to seek expert advice. You should also mention that the HECM tenure cash-advance plan acts like an annuity without double costs and the taxes often associated with reverse-mortgage-funded annuities.

The advice might be different with a jumbo reverse mortgage loan customer where the tenure option might be unavailable. Even in jumbo cases, originators should do a “gut check” to ascertain that their motivation helps the customer.