The Potential Benefits and Costs of HECMs Can Be Varied and Complex, and Concerns Exist That Some Consumers May Not Fully Understand the Product

While HECMs can provide senior homeowners with multiple types of  benefits, including the flexibility to use the money received and protection  against owing more than the value of the house when the loan comes due,  HECM costs can be substantial. Consistent  with this goal, HECMs allow senior homeowners to convert their home  equity into cash advances, while maintaining ownership of their homes. Most HECMs have adjustable interest rates. Home values: The amount of home equity remaining for the borrower or  heirs will be the value of the home, minus the amount owed on the HECM. Federal agency  officials agreed that some of these advertisements raised concerns. For example, these  regulators also formed a task force to examine consumer protections for  reverse mortgages, including those related to reverse mortgage marketing. Extent of Misleading HECM Marketing Is Unknown, but Selected Materials Contained Some Potentially Misleading Claims

While the extent of misleading HECM marketing is unknown, our limited  review of marketing materials found some examples of claims that were  potentially misleading because they were inaccurate, incomplete, or  employed questionable sales tactics. Development of HECM-Specific, Cross-Selling Regulations Is in Preliminary Stage, and States Have Uncovered Some Evidence of Inappropriate Cross- Selling

Concerns exist that reverse mortgage borrowers could be vulnerable to  inappropriate cross-selling, a practice involving the sale of financial or  insurance products that are unsuitable for the borrower’s financial  situation using the borrower’s reverse mortgage funds. For example, federal agencies have had some role in  informing HECM borrowers about the risks and costs of purchasing other  financial products using HECM funds. HUD has responsibility for enforcing the cross-selling provisions in HERA,  but the department is in the preliminary stages of developing regulations  to implement them. The results of our  limited testing of HECM counseling sessions found that counselors  omitted information required by HUD, particularly on alternatives to  HECMs and the financial implications of these loans. As a result of these control weaknesses, some  prospective borrowers may not be receiving the information needed to  make informed decisions about obtaining a HECM. GAO’s guidance  entitled Standards for Internal Control in the Federal Government states  that internal controls should provide reasonable assurance that agency  objectives—in this case, ensuring that prospective HECM borrowers are  well-informed—are being achieved. According to HUD officials, HUD’s  internal controls include the following:  1.  counseling standards as set forth in regulations, mortgagee letters, and  2.  a counselor training and certification program;  3.  a Certificate of HECM Counseling (counseling certificate) that, once  signed by the counselor and the counselee, should provide HUD with  assurance that counselors complied with counseling standards and  that prospective borrowers were prepared to make informed  decisions; 4.  a monitoring process in which HOC staff oversee the performance of  counseling agencies and HUD headquarters staff oversee grant  agreements with HECM intermediaries; and 5.  pre- and post-insurance checks by contractors and HUD field staff of  HECM loan files to ensure that a signed counseling certificate is  present for each loan. Counselors Did Not Cover All of the Required Information to Which the Counseling Certificate Refers

Although none of the 15 counselors covered all of the required topics, all  of them provided useful and generally accurate information about reverse  mortgages and discussed key program features. The counselor for  the other session did not ask for any additional financial information. The objectives of this report were to examine (1) the  potential benefits and costs of HECMs to borrowers, (2) federal agency  responsibilities to protect consumers from misleading HECM marketing,  (3) federal agency efforts to protect HECM borrowers from inappropriate  cross-selling, and (4) HUD’s oversight of HECM counseling providers. 7. We also reviewed the  cross-selling provisions in the Housing and Economic Recovery Act of  2008, and spoke with HUD officials about their planned implementation of  these provisions. The U. S. Department of Housing and Urban Development (HUD) requires that homeowner(s) interested in pursuing a Home  Equity Conversion Mortgage (HECM) receive information about the implications of and alternatives to a reverse mortgage.
Why GAO Did This Study

Reverse mortgages--a type of loan against the borrower's home that is available to seniors--are growing in popularity. However, concerns have emerged about the adequacy of consumer protections for this product. Most reverse mortgages are made under the Department of Housing and Urban Development's (HUD) Home Equity Conversion Mortgage (HECM) program. HUD insures the mortgages, which are made by private lenders, and oversees the agencies that provide mandatory counseling to prospective HECM borrowers. GAO was asked to examine issues and federal activities related to (1) the potential benefits and costs of HECMs to borrowers, (2) misleading HECM marketing, (3) the sale of potentially unsuitable products in conjunction with HECMs, and (4) oversight of HECM counseling providers. To address these objectives, GAO reviewed program rules; examined HECM advertisements; analyzed consumer complaint data; performed limited tests of HUD's internal controls; and interviewed HECM borrowers and agency, industry, and nonprofit officials.

What GAO Found

HECMs can provide borrowers with multiple benefits, but they also have substantial costs and are relatively complex. HECMs allow seniors to convert their home equity into flexible cash advances while living in their homes. Additionally, the borrowers or their heirs can fully pay off the HECM by selling the home, even if the amount owed exceeds the current home value. However, HECMs also have large insurance and origination costs. Furthermore, the long-term financial implications of a HECM can be difficult to assess because the borrower's remaining home equity depends on the amount of cash advances and interest rate and house price trends. Various federal agencies have responsibilities for protecting consumers from the misleading marketing of mortgages. Although these agencies have reported few HECM marketing complaints, GAO's limited review of selected marketing materials for reverse mortgages found some examples of claims that were potentially misleading because they were inaccurate, incomplete, or employed questionable sales tactics. Federal agency officials indicated that some of these claims raised concerns. For example, the claim of "lifetime income" is potentially misleading because there are a number of circumstances in which the borrower would no longer receive cash advances. Federal agencies have had a limited role in addressing concerns about the sale of potentially unsuitable financial products in conjunction with HECMs ("inappropriate cross-selling"). For example, an annuity that defers payments for a number of years may be unsuitable for an elderly person. HUD is responsible for implementing a provision in the Housing and Economic Recovery Act of 2008 that is intended to restrict inappropriate cross-selling, but the agency is still in the preliminary stages of developing regulations. Some of the states GAO contacted reported cases of inappropriate cross-selling involving violations of state laws governing the sale of insurance and annuities. HUD's internal controls do not provide reasonable assurance that counseling providers are complying with HECM counseling requirements. GAO's undercover participation in 15 HECM counseling sessions found that while the counselors generally conveyed accurate and useful information, none of the counselors covered all of the topics required by HUD, and some overstated the length of the sessions in HUD records. For example, 7 of the 15 counselors did not discuss required information about alternatives to HECMs. HUD has several internal controls designed to ensure that counselors convey the required information to prospective HECM borrowers, but the department has not tested the effectiveness of these controls and lacks procedures to ensure that records of counseling sessions are accurate. Because of these weaknesses, some prospective borrowers may not be receiving the information necessary to make informed decisions about obtaining a HECM.