Everyone involved in the reverse mortgage loan process—from brokers to underwriters to servicers—is likely to agree that counseling is essential for those considering the loan. When borrowers are able to discuss the details of leveraging their home equity with an independent third party, they are better able to assess whether the loan is the right fit for them. Counseling ensures that borrowers who move forward with a HECM are fully educated about their rights and responsibilities, protecting not only the borrower, but also the lender.
When the HECM program was established in the late ’80s, lawmakers recognized that counseling would be crucial, especially considering that, as seniors, HECM borrowers are part of a protected class who may need extra assistance. From the onset, lawmakers included provisions to ensure that prospective borrowers were properly educated, requiring them to speak with a certified housing counselor prior to origination.
HUD developed a training program in collaboration with AARP and other nonprofits to teach counselors how to educate seniors about this type of mortgage. That program has since evolved into a national network of FHA-approved HECM counselors who are thoroughly trained on HUD protocol to ensure that borrowers receive quality, unbiased information.
In the past several years, HUD has perfected its protocol, instituting mandatory exams every three years to ensure that counselors are current on new product offerings, establishing a roster of approved agencies and introducing a financial assessment test to extract pertinent information from borrowers.
But despite these improvements, the counseling sector continues to face challenges. Some concerns, like the need to obtain sufficient federal funding, are ongoing and may not be solved in the immediate future. Other issues, like consumer misconceptions and confusion over program revisions, continue to evolve and will hopefully improve as public awareness increases. Still, many counselors agree that if originators had a better understanding of the work they do, borrowers could approach the counseling process with more knowledge and efficiency.
Education and Protocol
During a HECM counseling session, counselors are required to cover three main topics: the basics of a reverse mortgage, the costs and benefits of the loan, and potential alternatives that should be considered. Counselors must also reference HUD’s Financial Interview Tool (FIT), a list of 25 questions regarding income, debt and health, designed to initiate productive discussion about how a HECM could help the senior meet their goals.
Because of geographic and financial limitations, as well as the basic fact that there are few FHA-approved counselors, HUD allows these sessions to be conducted over the phone. Still, some consumer groups argue that face-to-face sessions would be more beneficial for seniors, although only North Carolina, Vermont and (for some cases) Massachusetts require that HECM counseling be conducted in person.
According to Anthony Lopes, housing director at Cambridge Credit Counseling, it typically takes about an hour to 90 minutes to complete the session. Lopes says his counselors will follow up with the client within 45 days of the session and then, if an outcome hasn’t been determined, upon the counseling certificate’s expiration six months later.
For counselors, the mission is simply to educate. Amy Ford, director of home equity initiatives at the Washington, D.C.-based National Council on Aging (NCOA), says the agency’s goal is to supply quality information so that prospective borrowers can make an informed decision. “The goals of counseling are education, education, education—providing older adults with all the information necessary to allow them to make the best choice for them,” Ford says, adding that NCOA, which has a network of counselors across the country and a centralized call center, considers either outcome a success. “If someone decides to get the loan and it’s a good fit for them and they’re able to meet all their goals with the reverse mortgage, that’s a great outcome. And if someone decides to hold off or take some more time to think about it or decide it’s not for them, that’s also a good outcome. We 8 know the loan isn’t for everyone, so having access to the information and the tools to make the best choice possible is really our goal.”
Jeremy Shadrick, president of the HECM-focused counseling agency Quick Cert, echoes Ford’s comments. “Our goal is to educate, inform and make sure [prospective borrowers] have all of the facts before making decisions and going forward,” he says. “We want them to make sure they understand what they’re doing and know what they’re giving up. Equity is a valuable commodity to them and their families and we want them to understand that.”
One way counselors help seniors assess whether or not a HECM is the best way to meet their financial needs is by directing them to BenefitsCheckUp, a free online service provided by NCOA that claims to have helped about 3.8 million people find more than $14.1 billion worth of benefits. (Visit benefitscheckup.org to check it out.) The site prompts users for key information to determine if they are eligible for more than 2,000 federal, state, local, public and private benefits. HUD requires all counselors to direct clients to the site, and to walk through the checkup with those who fall below 200 percent of the federal poverty limit or who don’t have Internet access.
According to Ford, BenefitsCheckUp can provide some seniors with another solution. “Sometimes we find that someone needs just a small amount of money to close a gap or they have a very specific need—they find their utility bills are through the roof and they can access benefits for a weatherization or energy assistance program in their area. It might allow them to think about the reverse mortgage in a different way,” she says. “Sometimes there are veteran benefits, sometimes there’s property tax relief, sometimes there’s Medicare savings programs—you really just never know. It’s such a robust screening tool that anytime we can further that conversation I think that’s helpful for the client.”
Misconceptions and Reluctance
Many in the reverse mortgage space are hopeful that recent program changes and industry initiatives will help turn the tide of public opinion, and some counselors say they have noticed a difference among their clientele. Shadrick says his staff of 18 counselors has been talking about a noticeable change as of late. “There’s a difference in attitude from several years ago to today,” he says. “Before, most people had a negative perception coming into the counseling session about what the reverse was, and now people are hearing positive things in their communities. It does seem like it’s become a more accepted product.”
But long-held misconceptions about reverse mortgages still linger, and many counselors say they often have to dispel myths about the product. Lopes says the most common misconception is the idea that the bank automatically assumes ownership of the home. “A lot of people think the bank keeps the home,” he says. “They think they’ll lose the house. That’s the biggest one.”
Others note that some clients can be reluctant to participate in the counseling sessions, and that effectively extracting important information in these cases can be a challenge. In 2009, a GOA investigation into counselor compliance and efficiency revealed concerns about borrower attitudes. “Counselors interviewed for this study reported that many prospective borrowers did not take the sessions seriously. According to counselors, these prospective borrowers viewed counseling not as an opportunity to learn about the product and make a better decision, but as a hurdle between them and their goal,” the report stated. “Counselors stressed that prospective borrowers needed to allow themselves the time to learn about the product and the options without rushing toward a desired conclusion.”
Lopes, though, says that most of Cambridge’s clients do seem to be receptive. He says loan officers can help by stressing the value of counseling to potential borrowers. “If they discount the importance of counseling, they make the client less engaged and make our jobs more difficult,” he says. “They need to explain to them this is part of the process, this is what needs to be done.”
Funding and Fees
The housing counseling sector in general has long been plagued by funding concerns, relying largely on federal grants to keep doors open. In its lengthy reverse mortgage report to Congress published in June 2012, the CFPB acknowledged that funding was a major hurdle for agencies struggling to provide sufficient HECM counseling. “Maintaining an adequate cadre of well-trained, impartial and accessible counselors often comes down to funding,” the report stated. “The unpredictability of counselor funding remains a concern.”
News of the latest round of funding was released last June when HUD announced a $40 million grant to housing counseling agencies nationwide. HUD said the grant would be distributed among 334 FHA-approved agencies that provide all types of housing counseling with the goal to help more than 1.6 million households.
But the grant money only goes so far. HUD acknowledges that agencies will need to supplement the money with other sources of income, which essentially means they will have to charge clients when their grants have been tapped—a problematic practice considering the fact that financial hardship is often the catalyst that brings many to counseling in the first place.
HUD has mandated that agencies issue fees at a level deemed “reasonable and customary,” and it also prohibits them from turning away clients if they are unable to pay. When it comes to HECMs, HUD does allow for the fee to be paid using the loan’s proceeds. This, however, is also problematic, as it could detract from the counselor’s impartiality because the agency is not paid for sessions that do not lead to loans. The CFPB acknowledged the flawed situation in its report, admitting that this practice could create “misaligned incentives.”
“Grant funding is always going to be an issue,” Lopes says, adding that Cambridge charges about $125 for a session, a fee that fluctuates depending on the level of federal funding coming in. But Lopes says charging the client when funding runs out isn’t a great solution. “A lot of times they can’t afford to pay the fee upfront, and industry-wide only about 50 percent of counselees end up closing on a loan. So that means one out of every two sessions that we do, we are not going to get paid for if we roll the fee into closing. That’s a constant issue.”
Lopes says supporting the 16 counselors on staff at Cambridge Credit Counseling—seven of whom are dedicated full time to HECM counseling—is a tremendous challenge without sufficient funding. “When we don’t have grant funding, it makes it more difficult for us to pay our salaries and keep our lights on, and makes it harder for us to grow and be able to handle more clients.”
The CFPB has suggested establishing alternative sources to supplement government grants, namely the creation of a lender-funded pool. “Lenders could contribute funds to a central pool, which would then be disbursed to counseling agencies according to need or client volume. The pool could be administered either by HUD or by a neutral third party,” it stated. “A mechanism of this sort has the potential to provide a more stable funding source for counseling while mitigating any conflict of interest.” In order for this to happen, though, Congress would need to issue an amendment to HERA, which prohibits lenders from directly or indirectly funding counseling.
Shadrick says a lender-funded pool is a solid solution if the government is unable to properly subsidize counseling programs. “I think at some point the lenders as a whole have to put some kind of a pool together, whether or not it’s managed by HUD, to compensate for the sessions that don’t get paid for. That way, we don’t have to ask for payment from clients or ask for funding upfront.”
Shadrick says some lenders and loan officers don’t acknowledge that even though they are nonprofit, counseling agencies still have bills to pay. “It’s hard to make them see this is a service we’re providing and that counselors need to be paid because it’s a business,” he says. “They need to be aware of the lack of funding and what that means for counseling in the future if it’s not corrected and addressed.”
With all of the changes that have taken place in the reverse mortgage sector in the last year or so, Shadrick says concerns about counseling funding have fallen by the wayside. “I don’t think anybody’s really dealing with it, but it needs to be in the forefront because the counseling needs to be here and we’ve got to find a way to fund it. People need to know that counseling is in trouble.”
Progress and Change
While the funding issue is an ongoing problem that may not be resolved anytime soon, other aspects of HECM counseling have improved in the past several years.
According to Lopes, HUD’s protocol updates in 2009 enhanced the counseling process by ensuring that clients are getting the same quality education regardless of where they go. “The industry as a whole offers a much more consistent delivery of information now from agency to agency,” he says.
Ford agrees that counseling practices have progressed over the years. “I think that counseling ends up evolving organically when the market changes,” she says. “The conversation sometimes changes and counselors have to learn and grow and adapt and be sure they’re meeting the clients’ needs. And with the introduction of the exam and the protocol and the training and the retesting and the retraining—all that HUD has implemented has definitely enhanced counseling since 2009.”
Recently, NCOA and other agencies have noted a slight jump in the number of seniors seeking counseling. Ford attributes the increase to recent program changes.
“I think most agencies see a volume uptick when changes are on the horizon, and changes of this level of significance are definitely no exception,” she says. “You hear a buzz in news articles around the country on a daily basis saying reverse mortgages are becoming more restrictive, and I think that creates a level or urgency in the public. So I think we all typically see the volume do a little upturn around the time that changes are pending.”
Lopes says he has noticed a greater number of clients approaching the product as a financial planning tool to support retirement. “I got on the phones [in March] and I saw a lot more people who were looking at it as a financial planning tool than I had in the past,” he says. “It does seem like more people are looking at it for long-term planning. Is it 60 percent? No, but it went from 0 percent to 10 or 20, so it does seem to have changed a little bit, [shifting] more to the financial planner segment.”
Still, some hurdles remain. Ford says the program’s constant evolution presents challenges for counselors. With so many rule revisions, it’s tough for agencies with limited resources to stay on top of all the changes. But Ford says NCOA does its best to educate its staff. “We have a rapidly changing marketplace. We monitor changes very closely and we have monthly conference calls and trainings and Listservs and PowerPoints—everything we can do to keep our counselors as up-to-date and prepared as possible for all the questions that can come to the table.”
Lopes says the recent wave of fixed-rate variant products has presented some challenges. “With these new products, there’s very little training coming from anywhere. Some of them are getting squashed, but it looks like there’s going to be a new round of them coming out,” he says. “They could easily lead to confusion, especially if you have a counselor who looks at the protocol like it’s the Bible.”
Financial Assessment is also likely to lead to some confusion. Although the industry anticipated the release of FA guidelines in early 2014, HUD says it’s still refining its protocol and sources say it may not be finalized until the end of the year. Many agree that FA will impact counseling to some degree. “There will be more material that we’ll have to cover, so we’ll likely see longer counseling sessions, and there might be groups that will have to raise what they’re charging. There’s going to be fewer loans that close, because when things get to underwriting, issues are going to come up [that didn’t before FA],” Lopes says. “Also, lenders already have their own underwriting policies over and above the protocol that they need to follow, so there’s a good chance that we’re going to see more of a variance in underwriting from lender to lender. It might cause confusion.”
Shadrick agrees that FA will impact counseling, but says overall it will be a positive change for the industry “It’s going to take longer to explain everything and make sure clients understand everything. But I think for the longevity of the product, it’s the right thing to do. We’re just going to have to re-educate ourselves and learn how to deal with it, because it’s coming. We just have to figure it out and make it work.”
Facilitation and Efficiency
The reverse mortgage program may continue to evolve and hurdles related to this progress will likely affect counseling down the road. For now, though, many counselors say originators can help facilitate the counseling process by learning more about what it entails.
First, counselors say originators need to remember that they are obligated to review variations in pricing with clients. “We’re required to cover what fees vary and what fees don’t—origination, margin, interest rate,” Lopes says. “Loan officers don’t realize the huge disparity we see every day in pricing.”
Ford says a counselor’s job is to inform clients of their options, but they will never comment on any specific lender. “We never discuss any particular lender—ever. But we do discuss that it’s a marketplace. There’s competition and you want to make sure you’re getting the best deal that’s the best fit for you.”
Counselors also say that originators need to take the time to work through important details of the loan with the client before sending them to counseling.
“Make sure you’re spending time with your client, make sure they understand what the reverse mortgage is,” Shadrick advises. “Honestly, if the loan officer does their job, nothing that we go over should be a surprise.”
Lopes says omitting key facts prior to counseling can deter a client. “If the loan officer leaves something out, it’s going to come out during counseling,” he says. “If it’s going to be an issue, it’s not the counselor’s job to sway the person—we can’t. We have to educate them and provide them with the information to make their own decision. So you may have borrowers who don’t take out a loan because they’re confused [by this omission] and it sours them on the whole process.”
Lopes also stresses the importance of properly preparing clients for counseling, explaining what the process entails and how long it will take so they know what to expect. “They need to prep them on what the process is going to be. We have clients who say, ‘I don’t know why I’m calling. I was just told I need to be counseled and to call someone on this list.’ We’ll say it’s going to take a minimum of an hour on the phone and they’ll say, ‘Oh, wow, an hour! I didn’t know that,’” he says. “So make sure they know they are going to spend an hour or more on the phone with a housing counselor, and that they are going to cover all this information that’s here to help them make sure they understand everything.”
Lopes says originators should also make sure they have informed the client that anyone else listed on the deed will also need to undergo counseling. According to one counselor at Cambridge, this can be an issue. “We have clients calling us who have a spouse or someone else on the deed who needs to be counseled, but the client is unaware that the other party needs to be counseled. It seems like the LO isn’t asking if there is anyone else on deed. This leads to confusion and the client is sometimes put off by the process.”
Ford suggests originators review with clients what documents they’ll need to have ready for the session, a practice that may become even more important when FA goes into effect. An essential aspect of counseling is an assessment of the senior’s budget, and a number of documents need to be gathered and reviewed to get an accurate financial picture. “Anytime the client can come to the table with a good understanding of their income and expenses, it really enhances that conversation,” Ford says.
Most importantly, originators should recognize the value of counseling. Those who undergo counseling and choose to move forward with a HECM can do so knowing they have properly explored their options and made a sound decision. As Ford says, “Ultimately, the more informed decision the client makes, the better the loan will perform over time. The more information and knowledge the client can glean about the product, obligations, opportunities, alternatives, etc., the better. It sets the client up to thrive.”