A New Approach to Protecting HECM Consumers
Consumer advocates worry that HECM borrowers don’t really know enough about the loan, or how the loan works, when they sign on the loan. Reverse mortgages work differently and are much more complicated than forward mortgages – the typical type of mortgages that the people use when they purchase a home. The discrepancy between naïve borrowers and knowledgeable lenders worries many consumer advocates. Some steps which have been taken, and are still being taken, include:
Mandatory Counseling and Mandatory Disclosures
The Federal Government has attempted to educate potential HECM borrowers through mandatory disclosures and mandatory counseling. While consumer activists applaud the effort, they point out that these rules are limited and don’t adequately address the need to educate consumers.
Under the HUD’s directive, lenders cannot accept applications for HECM reverse mortgages until the potential borrower delivers a certificates which attests to his/her having been successfully counseled by a HUD-approved counselor. This counselor must be independent of the lender. Most borrowers find their counseling experience useful. However, critics note that it does not protect seniors from taking a Reverse Mortgage when they would do better without one. Few seniors opt out of the process as a result of counseling, suggesting that the process doesn’t push them to think about whether or not they really need a Reverse Mortgage.
Consumer advocates and senior advocates would like to see a counseling service that helps the individual decide whether or not s/he REALLY needs a Reverse Mortgage.
At present, the counselor advises the individual on certain aspects of the HECM transaction:
* Options for drawing cash upfront
* Amounts that can be drawn monthly for as long as the borrower lives in the home.
* Amounts that can be drawn monthly as a line of credit.
* Any combination of these draw options.
* How the loan will affect the borrower’s heirs
* How the loan will affect the borrower’s taxes and social security
* How the loan will affect spouses – both borrowing and non-borrowing
* The borrower’s future financial status in connection with their draw decision.
* Initial and future costs to the borrower, including loan costs and future monthly fees and expenses.
* The combination of interest rate and origination fee
Avoiding a Second Counseling Session
It is advised that seniors combine counseling with financial advisors – specifically, financial advisors who specialize in senior finances – and HUD counselors to get a full picture of the HECM loan.