Jan-Feb2020

lines ‘earn interest,’ because credit line growth is simply increased access to borrowing power, comparable to an increase in a credit limit on a credit card.” If it were earning interest, it would be taxable, and it is not taxable, they pointed out. In addition, Hultquist said, some borrowers struggle with the concept of how the line of credit continues to grow but then vanishes after they die. He offered an analogy that might help borrowers, as well as loan officers. Credit card companies might increase the credit limit for a borrower. However, if the borrower should die, the credit card company doesn’t then max out the credit limit and “leave a stack of cash on your front porch.” “It is just pledged funds. It is credit to the borrower,” Hultquist said, adding that a borrower simply is increasing their borrowing capacity. McMinn said the correct terminology is important so that the nuances are clear. It’s critical to make sure that borrowers aren’t told that HECM lines of credit are “guaranteed to grow.” While that is one of the selling points, loan officers need to be careful because it does not grow under several circumstances, including the following: 1. The borrower draws funds; 2. The loan is not in good standing; 3. Repair set-aside estimates are too low; 4. During the initial disbursement limit in the first year; 5. If there are negative interest rates, which is rare but happens, as it has in Europe and Japan, Hultquist said; 6. If the Maximum Mortgage Amount is met, which is spelled out in the regulations, as well, Hultquist added. Avoid ‘Tax Free’ Statements Loan officers sometimes overstate the tax consequences, suggesting that the HECM offers “tax-free money,” Hultquist said. Overstating that point has been known to cause problems, especially if the borrower takes the statement literally. For example, McMinn said, a number of taxes are involved in the transaction, such as property taxes, recording taxes and transfer taxes. “The list goes on, so when we look at that and we are saying out there this is a tax-free loan, which portion of it actually is tax free?” McMinn said. The proceeds and the line of credit growth are tax free, he said. “To get the loan, there are taxes involved in that.” Florida, for example, has a Documentary Stamp Tax that is 35 cents per every $100, he also said. The bottom line is that the Consumer Financial Protection Bureau (CFPB) has determined that some consumers interpreted advertisements saying the proceeds were “tax free” meant they didn’t have to pay property taxes, McMinn and Hultquist pointed out. “These are the types of things we want you to think about,” Hultquist said. Knowing a Client’s Needs The discussions with clients should involve a clear understanding of what borrowers might want, even if a loan officer might not consider those ideas to be the best choices. While an adjustable rate HECM traditionally has offered a lot more money than a fixed rate, a borrower might want a fixed rate. Such borrowers are rate-risk sensitive and might want the comfort and security of having taxes and insurance taken care of through a voluntary Life Expectancy Set Aside (LESA), even though the initial draw might be lower. The best Rules continued on page 28 “We have got a lot of folklore. It has kind of been passed down from loan officer to loan officer or maybe your mentor to the loan officer. And we just take it as gospel.” —Jim McMinn, Finance of America Reverse REVERSE MORTGAGE / JANUARY-FEBRUARY 2020 27