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NRMLA Issues Ethics Advisory on Planned Prepayment HECM Loans

reverse mortgage newsIt’s not often discussed or quite frankly on the radar of most reverse mortgage professionals, structuring HECM loans for higher initial payouts followed by an immediate pay-down.

It’s a tricky strategy that is unfortunately employed by a few reverse mortgage lenders or brokers, strategic prepayments following a large initial loan payout at closing. In its most egregious form, it works like this: Broker A is working with the Smiths who have a very low mortgage payoff or mandatory obligations. Approaching the loan closing date said broker encourages the Smiths to take a lump sum distribution up to the 60% first-year distribution limit keeping their upfront FHA insurance premium at one-half of a percent telling them they can repay the excess withdrawals in the first month to avoid the interest charges. Consequently, the broker benefits with a higher UPB or Unpaid Principal Balance which may increase his loan pricing or commission while the borrower is convinced they are unaffected. Isn’t this a win-win scenario?

If there’s one thing history has taught us it is that ethical guidelines are born from questionable business practices…

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  1. This looks like another case of blame the originators for what others are doing. Every case of this I have seen has been initiated by a housing counselor telling a borrower with low or no mandatory distributions that they could have a Reverse Mortgage without an origination fee.

    The borrower is either steered to a lender who will do what you suggest or the borrower asks how to do it. In either case, my experience is that it is always initiated by the counselor talking about pricing.

    I am happy to originate a loan for a low commission, but I am not willing to originate loans for free. Some, not all, counselors advise borrowers about pricing in ways that they expect me to originate the loan with no origination fee and no yield spread money.

    I think it is unfair to be blaming originators for what counselors are doing. My experience is that counselor steering is a very common practice. I have seen it far too many times for the number of Reverse Mortgages I have closed.

    • Your experience surprised me. You explained it well and presented so well that it is quite understandable. While Senator Elizabeth Warren and her CFPB would most likely praise the counselors for a job well for the consumer, the lender would be in violation of this new ethical standard.

      Then there is the example given by Jesse G about his new lender agreement below.

      So if counseling is promoting this technique but there are penalties for doing it, why has the ethics opinion been issued?

      This is a very odd situation since there can be a very clear borrower benefit at a cost to secondary market investors.

    • Interesting comment, Don. I agree with you that counselors should not be referring clients to specific lenders, nor should they be speaking for lenders in regard to fees. However, talking to clients about the ways that lenders can vary is explicitly part of our mandate from HUD, as expressed in the HECM Counseling Protocol.

      As a reverse mortgage counselor, I do indeed talk to clients about the potential of lender flexibility in upfront fees, and I tell them to talk to their originator. I do this because I know that lenders do vary in what they offer. I never tell clients that they can definitely have a zero origination fee — that is up to the originator, if they choose to go that way.

      It is then entirely the responsibility of the originator to educate the borrower about what they can and cannot offer and under what terms. To say that unethical behavior on the part of the originator is the fault of the counselor is quite a stretch.

      • Christena,

        Here is the dilemma. If you suggest the strategy, you have done right for your client, the consumer, but if the borrower shops that strategy without telling the lender that she will be paying down the loan in a few days, the lender could be required to pay back all commissions paid on that loan.

        Who loses? If there is no payback of commissions, the investor who is paying the commission because the commission was based on the loan being at least the size it was at closing for a number of years. An immediate pay down could result in the investor getting a negative return on their purchase of the loan.

        If the lender must pay back the commission then the investor loses confidence in the pools of HECMs that are being securitized through Ginnie Mae. The lender is receiving no compensation despite the costs they are incurring.

        So if the lender proposes it, they are potentially committing fraud when they sell the loan through securitization but if the counselor suggests it, how is the lender to protect itself against the same accusation of having proposed it? Can we expect the borrower to remember who proposed what and then disclose it later?

        While it is clear that the CFPB and Senator (Warren) Mann will applaud counseling efforts to lower costs to consumers, how will lenders fare in that kind of environment?

  2. What ethics? This is the wild west on taking advantage of the elderly

    • Darlene,

      I suggest you read what Don Opeka wrote.

  3. Am I the only one who has a recapture clause in their broker agreement? If my clients did that I would need to pay back all YSP to the lender based on my agreement. I guess this only comes into play when you work for the lender directly as a correspondent?

    • Jesse, I was thinking the same thing. Have the lenders not been going back to the TPO’s and taking back the money?

    • I have heard others say the same thing about their TPO agreements.

  4. I have a potential client who has indicated on the phone a desire to do a fixed rate HECM (currently no mortgage exists), accept the complete amount at closing, then pay back about half since that is all of the money they want. This sounds like I need to document very well what they want to do. I’ll be meeting with them this week to see why they want to do it this way…interesting that this was published on the day I received the initial call!

    • Great feedback Bob. I would indeed heavily document their conversation with you and why they are taking a fixed and then repaying 1/2 of the draw. Are they adverse to adjustable rates?

    • My concern is about their ability to borrow back the money they use to pay down the balance due and to get additional cash from the amount of they could not take at closing due to the first year disbursements limitation and the closed end nature of a fixed rate HECM.

      If they need cash now, what reassures them that they will not need more cash in the future. If they eventually pay off the entire balance due and have to gain access to cash from a HECM later, they will incur the same closing costs all over again.

  5. Not at all hard to imagine the scenario described by Bob above. Client has a specific ‘one off’ need for funds and a firm time-frame….wants the certainty of a fixed rate but doesn’t need the 60% of IPL he is required to take at closing…solves the “problem” by returning the excess, unneeded funds immediately after closing. In these cases, the borrower would prefer to receive less than the 60% at closing, but doesn’t have that option under current program guidelines.

  6. This is not a credit card where no interest is charged for taking cash for less than a month. If money is taken in a month and repaid that same month, interest will charged for the number of days the advance is outstanding.

  7. Recently, I went to a presentation by a competitor and they advised to over-fund the loan, watch the line of credit grow, and when the market takes a dip in value to take all monies out of the line.

    I have many clients that just need a bit more money ad are worried about having equity in the future if they decide to sell and of course the legacy they want to leave to their children. I advise them they can make a payment if they like in any amount at any time. It is usually not enough to pay the entire interest due, but it give them some control. Conversely, many self-employed can benefit in this way too. I do not believe this is a violation. Honestly, I expect less than .01% to make this payment commitment.

    Those hesitant to get an adjustable rate and not needing all the funds should not be a violation. The program is still not as user friendly as it could be. In this scenario the only option for the fixed rate borrower is to refi.

  8. Keep it simple stupid-

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