This is the  opposite of what happens in forward mortgages, which are characterized  as “falling debt, rising equity” loans. A number of federal and state agencies have roles in overseeing the  reverse mortgage market. These agencies include HUD, which administers  the HECM program and oversees entities that provide mandatory  counseling to prospective HECM borrowers. Although Various Agencies Have Some Responsibility for Assessing HECM Marketing, Some Advertisements Contain Potentially Misleading Claims

Various state and federal agencies have some responsibility for assessing  marketing for reverse mortgage products, including FTC, federal and state  banking regulators, and HUD. 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. This claim was made by  HUD itself in its instructions to approved HECM lenders; however, in  December 2008, HUD issued guidance to HECM lenders explaining the  inaccuracy of this claim. Furthermore, consumers who  have not been cautioned about such claims could pursue HECMs with  misunderstandings about the product. 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. Because cross-selling typically involves the sale of insurance products  generally regulated at the state level, the role of federal agencies in  addressing the issue of cross-selling in conjunction with HECMs has been  limited and largely has been focused on consumer education and  disclosures. The provisions are intended to curb the sale of unsuitable financial  products to consumers using HECM funds. A number of state insurance regulators have reported cases of  inappropriate cross-selling involving violations of state laws governing the  sale of insurance and annuities. Many states have passed suitability laws  that are designed to protect consumers from being sold unsuitable  insurance products, including annuities. HUD’s Internal Controls Do Not Provide Reasonable Assurance That Counseling Agencies Are Complying with HECM Counseling Requirements

HUD’s internal controls for HECM counseling do not provide reasonable  assurance of compliance with HUD requirements. These controls include (1) counseling  standards as set forth in regulations, mortgagee letters, and a counseling  protocol; (2) a counselor training and examination program, and (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. 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. For example, 6 of the counselors did not provide  estimates of the maximum amount of funds that might be available to the  counselee under the HECM payment plan options. However, 6 of the 15 counselors for  our undercover sessions overstated the length of the counseling sessions  on the counseling certificates. Because of the weaknesses in HUD’s internal controls, some prospective  borrowers may not be receiving the information necessary to make  informed decisions about obtaining a HECM.
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. These mortgages allow seniors to convert their home equity into flexible cash advances while living in their homes. 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) misleading HECM marketing, (2) the sale of potentially unsuitable products in conjunction with HECMs, and (3) the oversight of HECM counseling providers. This testimony is based on a GAO report being released today (GAO-09-606).

What GAO Found

While HECMs have the potential to play a key role in meeting the needs of seniors facing financial hardship or seeking to improve their quality of life, the product is relatively complex and costly and the population it serves is vulnerable. GAO's work identified areas of consumer protection that require further attention, including the area of HECM marketing. Various federal agencies have responsibility 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. Consumers who have not been cautioned about such claims could pursue HECMs with misunderstandings about the product. To date, federal agencies have had a limited role in addressing concerns about the sale of potentially unsuitable insurance and other financial products in conjunction with HECMs (known as "inappropriate cross-selling"). States generally regulate insurance products, and 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 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 in the preliminary stages of developing regulations. 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 required information to prospective HECM borrowers, but 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.