Concerns about the counseling requirement for Home Equity Conversion Mortgage (HECM) are not about ineffectiveness, or it is being mandatory. Rather, they center on a subject that is believed to be vulnerable to conflict of interest: funding.
In the key findings in the Consumer Financial Protection Bureau’s (CFPB) report, the current payment scheme for counseling is said to undermine counselor’s impartiality. In the current scheme, counseling agencies can only receive payment if and when the loan is approved. This makes for a scenario where in encouraging seniors to take the reverse mortgage loan is on the best interest of the counselor.
Another implication of the current payment scheme is a loss for the counseling agency in case senior-borrowers decided not to close the loan. That means, the counseling agency will not get paid, and according to CFPB, this could have an adverse impact on the availability of counseling.
Funding for the mandatory counseling has been an ongoing problem for the borrowers and counseling agencies alike. Under the Housing and Economic Recovery Act (HERA) of 2008, lenders cannot be involved in the financing of the counseling. While the non-involvement of lenders is designed to prevent any conflict of interest, the after-effect of diminishing funds from the government is causing the sheer harm the prohibition intends to prevent.
For this year, the Department of Housing and Urban Development (HUD) allocated $4 million in grants to reverse mortgage counseling agencies. The funds are, however, not enough to sustain the HUD HECM counseling protocol. Under the protocol, agencies will ask for a reasonable counseling fee, waiving it to seniors with income less than twice the poverty line. Counseling agencies are also expected to push for the counseling even if clients will not be able to pay. Currently, majority of counseling agencies charge $125 to be collected at loan’s closing.
With diminishing public grant and conflict of interest to address, CFPB recommends that the industry develops a lender-funded pool. In lender-funded pool, lenders are encouraged to contribute funds to a central pool administered by a neutral third party. CFPB believes that through this approach, a stable funding source for counseling is possible without creating any conflict of interest.
While conflict of interest is a serious ethical issue, creating a lender-funded pool under the supervision of a neutral third party like HUD may not necessarily create corruption. The counselor is one of the most influential persons in a reverse mortgage transaction, and without consistent funding, a growing number of senior-borrowers may find themselves without access to this group that can provide the necessary reverse mortgage information. HECM is the only financial product that requires counseling. Because it caters to an aging population and involves their most valuable asset, their residential property, industry leaders and government alike want to make sure they make a judicious decision.
For around 90 minutes, a senior-borrower can opt for either face-to-face or telephone counseling with an HUD-approved counselor. Lenders are prohibited to direct a senior-borrower to a specific counselor or counseling agency. Rather, the HUD requires them to provide a list of counselors, which include local and national agencies allowed to provide counseling across the country.
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