Reverse Mortgage Advertising – Compliance Risks

QUESTION
Last year, our company got into reverse mortgages. We hired on a few loan officers who knew a lot about reverse mortgages, and we set up a reverse mortgages division. 

At first, we did well until the banking department notified our CEO about advertising violations involving our reverse mortgages. Our compliance manager had approved the advertisements, but what’s done is done. 

We had to go through an examination of all our reverse mortgage advertising, and we were stuck with a list of violations and penalties. We scaled down the reverse mortgages division. I’m sure this could have all been avoided. 

Now, there’s talk of expanding it again. This time around, I think we need help. I would appreciate your telling us some mistakes we could watch out for in the future. 

What are some advertising mistakes in reverse mortgages?

ANSWER
There are many advertising pitfalls associated with reverse mortgages. Over the years, these violations have become the basis for lawsuits, administrative actions (state and federal), agency concerns, and adverse reputation risks. I’ll mention a few for you to consider. If you are not really familiar with this area of advertising compliance, please contact us for support. 

Most importantly, always make it a point to take the consumers’ point of view as it relates to reverse mortgage advertisements. Too often, they misunderstand one or more important features of the loans and the loans’ potential risks. Ads that downplay the terms and risks of reverse mortgages or confuse prospective borrowers lead to trouble. 

Here are a few pointers to consider. Revise your advertising accordingly. 

- It may seem odd, but many consumers do not understand that reverse mortgages are loans. For instance, some consumers falsely believe that the government provides reverse mortgages and that, therefore, repayment would not be required. 

- Indeed, many consumers find it difficult to understand that reverse mortgages are loans with fees and compounding interest like other loans since ads may not include interest rates or include them in the fine print. 

- Some consumers mistakenly believe that money received through a reverse mortgage represents home equity they had accrued over time and that there is no reason they would have to pay it back. 

- Consumers are confused by incomplete and inaccurate information. For instance, reverse mortgage advertisements often erroneously imply or state that borrowers cannot lose their homes or that borrowers make no monthly payments. 

Sometimes, ads misleadingly claim that reverse mortgage proceeds are “tax free,” thus leading consumers to believe they would not have to pay property taxes. 

- One of my pet peeves is that some advertisements leave the impression that the main benefit of a reverse mortgage is that consumers can remain in their homes “as long as they want” based on ads that state that “the title and deed remain in their name.” Consumers then assume that having a reverse mortgage means they can never lose their homes. This is a disingenuously created perception because while reverse mortgage borrowers retain the title and deed, the loans are secured by a lien, and borrowers can, in fact, lose their homes.

Furthermore, reverse mortgage borrowers are responsible for several requirements, including paying property taxes, homeowner’s insurance, and property maintenance. Failing to meet these requirements can trigger a loan default that results in foreclosure. Advertisements that create the impression that there is no risk are thus misleading. 

- Consumers often do not read the “fine print.” We all know that! Inevitably, most consumers do not read the fine print in printed ads; indeed, virtually no consumers read the fine print used in television ads. 

Ads may include information about borrower requirements in fine print, but regulators do not tolerate the “fine print” disclosure gambit, especially and egregiously where the fine print generally addresses tax and insurance requirements, property maintenance, and residency requirements, repayment terms, and other essential details about the loans. 

- Consumers misunderstand the role of government due to defective reverse mortgage ads. This is caused by ads that state that the loans are “government insured” or a “government-backed program.” Some misleading advertisements use text and graphics, such as eagles, government seals, and so forth, to imply that reverse mortgages are affiliated with or offered by the federal government. 

- Some consumers complain that language or images in the ads reference the Department of Housing and Urban Development (HUD) or the Federal Housing Authority (FHA). Regulators take the position that federal agencies’ names in the ads deceptively signal that the government is funding and operating a reverse mortgage program for senior citizens. 

- Regulators issue administrative actions where ads claim “tax free” money because it is a sign that the company is trying a subterfuge to suggest that the reverse mortgage is a government-run program or benefit.

One final note. Be sure that the reverse mortgage ad is complete with respect to advertising compliance – and I do mean totally complete! Incompleteness in ads can lead to a determination that they are unfair or deceptive if coupled with claims of guarantees or strong statements about the absence of risk.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Prohibited Acts and Practices

QUESTION
Thank you for your FAQs. We get together each week for sales and compliance meetings, and your FAQs are always discussed. We find them timely, informative, and helpful. 

I want to thank you for your help in informing us about how to navigate the compliance issues associated with the pandemic. Your assistance is more needed now than ever. We have downloaded each update to your Checklist on Disaster Recovery and Business Continuity, which includes a response to the pandemic. 

Also, we purchased your comprehensive Business Continuity Plan with Pandemic Response. Our company has distributed the Checklist and Plan to all our branches and branch managers. We also train on them and keep them current. 

Do you expect to publish any updates soon, given the new surge of the virus? 

As a Chief Compliance Officer, I often wonder what a firm like yours sees regarding the common prohibited acts and practices. From your vantage point, you likely have a much wider view than I do here at my company, even with my attending training, webinars, and educational forums. I hope you would share a few precautionary tips with us to be on the lookout for them. 

What are some common prohibited acts and practices?

ANSWER
I appreciate your encouraging words regarding our Business Continuity Plan Checklist & Workbook (Includes COVID-19 Pandemic Response). 

The Checklist went through eight updates from March to November 2020. It is as good now as it was in November! However, there have been a few important regulatory issuances since then. 

The Delta variant has presented new challenges to companies, primarily concerning training and remote work. An update will be published soon. 

The Checklist is still complimentary!

• To request the Business Continuity Plan Checklist & Workbook (Includes COVID-19 Pandemic Response), please click HERE. 

With respect to the Business Continuity Plan with Pandemic Response, because it is one of our policy documents, we continually update it for changes involving legal and regulatory compliance and Best Practices. We do not just sell this policy; we work with you to ensure that you understand it and conform it to your business needs. 

• To request the Business Continuity Plan with Pandemic Response, please click HERE. 

I think you make a good point about how my firm sees much more than any single company regarding regulatory compliance issues. Whereas a Compliance Manager for a company is locked into a provincial setting, more familiar with a company’s compliance needs than the broad scope of compliance needs facing similarly situated entities, our firm sees it all. 

These days, depending on just the Compliance Manager – no matter how competent and well-resourced – is sort of like the fallacy of putting all your eggs in one basket. This form of compliance is usually risky: it is the unknown knowns that catch you! 

This is why our clients are small firms with limited internal compliance up to money center banks with large compliance departments that nevertheless retain us as their independent resource. Even the largest companies do not have the kind of panoramic vision our firm has since we deal exclusively with companies that are transactionally involved in mortgage lending and mortgage servicing. 

Our fees are low and cost-effective because we distribute our overhead across so many clients. That makes it possible for us to reduce the fees for every company, small and large. 

• For information about our compliance support, please click HERE. 

Some Common Prohibited Acts and Practices 

for Credit Secured Residential Dwellings 

The question about prohibited acts and practices necessarily leads to a broad array of possible “precautionary tips.” I could write a lengthy tome on this subject. However, I will provide some compliance concerns that are repeat offenders. 

The following list is short compared to the many compliance infractions that beset companies. 

Some items on the list result from the broad scope of view I mentioned above; meaning, we regularly caution our clients about them. 

I list the “precautionary tip” first, followed by a brief outline of the regulatory challenge.

Delayed Crediting of Payments 

A mortgage loan servicer must credit a periodic payment to the consumer’s loan account as of the date of receipt, except when a delay in crediting does not result in any charge to the consumer or in the reporting of negative information to a consumer reporting agency. 

If a servicer specifies in writing the requirements for the consumer to follow in making payments but accepts a payment that does not conform to the requirements, the servicer must credit the payment as of five days after receipt. Partial payments may be held in suspense or unapplied funds accounts. 

Late Charge “Pyramiding” 

A creditor, assignee, or servicer must not impose on the consumer any late fee or delinquency charge in connection with a payment when 

(1) the fee or charge is attributable only to the failure of the consumer to pay a late fee or delinquency charge for an earlier payment, and 

(2) the payment is otherwise a periodic payment (i.e., an amount sufficient to cover principal, interest, and escrow, if applicable, for a given billing cycle, even if the amount is not sufficient to cover late fees, or other fees, or non-escrow payments a servicer has advanced on the consumer’s behalf) received on its due date or within any applicable grace period. 

Failure to Provide Payoff Statement 

A mortgage loan servicer must not fail to provide within a reasonable time (not more than seven business days, after receiving a written request), an accurate statement of the amount currently required to pay the obligation in full as of a specified date, often referred to as a payoff statement. 

(Note: This requirement applies to a loan secured by a dwelling, whether or not the dwelling is a principal dwelling.) 

Loan Originator Compensation 

Payments may not be made to loan originators based on the terms of the transaction other than the amount of credit extended. In general, a loan originator who receives compensation directly from a consumer may not also receive compensation from someone else in connection with the same transaction (“dual compensation”). 

Steering 

Loan originators must not steer consumers to consummate a loan not in the consumer’s interest based on the fact that the loan originator will receive greater compensation for the loan. 

Loan Originator Qualification Requirements 

Loan originator organizations (that is, loan originator entities other than individuals) must make sure that their loan originators are licensed or registered under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) and other applicable laws. 

For employees who are not required to be licensed, a loan originator organization must ensure that its loan originators meet character, fitness, and criminal background standards similar to SAFE Act licensing standards and provide training appropriate and consistent with the loan originators’ origination activities. 

Name and NMLSR Identification Number on Documents 

Each loan originator must include its name and NMLSR identification number on any of the following documents whenever provided to a consumer or presented to a consumer for signature-credit application, note or loan contract, and security instrument. Any loan originator without an NMLSR identification number must include its name. 

Financing of Single Premium Credit Insurance 

The financing of single premium credit insurance is prohibited. 

Negative Amortization Counseling 

First-time homebuyers who enter into transactions that may result in negative amortization must obtain counseling regarding the amortization features and provide documentation of the counseling from a HUD-approved or HUD-certified counseling organization or counselor. 

Ability to Repay 

Creditors must consider eight underwriting criteria: current income or assets, current employment, credit history, monthly mortgage payment, monthly payment for other mortgage-related obligations, monthly payment for other loans associated with the property, other debt obligations, and monthly debt-to-income ratio or residual income. 

Lenders must apply the underwriting criteria to determine whether borrowers have the ability to repay their loans based on fully indexed rates and not teaser rates. Lenders must verify the information relied on in applying the underwriting standards. 

Lenders are presumed to have complied with these ability-to-repay (ATR) requirements if they issue “qualified mortgages” (QMs) with a “safe harbor” for lower-priced (generally higher quality, prime) loans and a “rebuttable presumption” for higher-priced (generally lower quality, subprime) loans. 

Periodic Statements 

Mortgage loan servicers must provide periodic statements for any closed-end consumer credit transaction secured by a dwelling except for reverse mortgages, transactions secured by interests in timeshares, and any fixed-rate loan for which the servicer provides a coupon book that contains specified information. Small servicers are exempt from this requirement.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Unduly Influencing an Appraiser

QUESTION
We have been assessed with an administrative action for unduly influencing our appraisers. Our state regulator is meeting with our lawyer to work out a plan to remediate this situation.

Recently, we also received a letter from another state banking department requesting documents and procedures relating to our appraiser independence. We are licensed in many states and, needless to say, we’re concerned that many other states will be examining us on appraiser independence. 

We have an appraiser independence policy and procedures, but that is not satisfying the regulator. They believe it is “boilerplate,” and we are not following our own plan, which, they also say, is deficient. On top of that, they picked out several areas that show we are unduly influencing our appraisers. 

We would like to get some guidance on how to prevent this from happening to us again. 

What are some of the pitfalls to watch for to avoid unduly influencing our appraisers?

ANSWER
Policies and procedures don’t mean much if you’re not implementing them. You’re just wastefully pontificating if you do not take them seriously. And what do I mean by that? 

First of all, you must have comprehensive policies that meet regulatory scrutiny. Don’t try to hand a “boilerplate” policy to a regulator with the hope that it is sufficient. Stay away from “manual mills” and cheap policies offered by firms in return for getting you on a long-term retainer for legal or regulatory compliance support. Some of these manual mills pump out policies that are “customizable.” But, often, the purchaser does not know how to customize a policy based on current regulatory rules and laws. So, what’s the point? 

And, many regulators see the same policies from company to company, and these regulators know when you’re trying to snow them with the exact same policy they’ve seen elsewhere. Stay away from one-size-fits-all policies. Make sure the document fully reflects the way you do business. 

Secondly, practice what you preach! Monitor and periodically test your policies and procedures. How do you know they are being implemented if you are not monitoring and testing? Don’t assume anything. Over time, procedures often get bent out of shape. Your monitoring should include defects, remedies, and re-testing plans. An untested appraiser independence policy leads to why the policy doesn’t cut it with regulators.

We offer the Appraiser Tune-up if you need an objective review! 

Management should be hands-on with appraisal independence. Accurate and unbiased evaluation of the collateral is foundational to the mortgage banking edifice. Ultimately, it is management’s responsibility to select, evaluate, and monitor the individuals performing appraisals, pursuant to the selection process set forth in the subject policy. 

In accordance with the policy guidelines, for staff and fee appraisers given an assignment, the basis for choosing them should ensure that the appraiser is independent of the transaction, possesses the requisite expertise, and holds the proper state certification or license, if applicable. 

In promulgating the policy, management should set forth important process issues. It is critical that management certify the procedures for when to obtain appraisals and when to obtain a re-appraisal, including frequency and scope. It is critical that appraisal and evaluation compliance procedures determine that appraisals comply with appraisal regulations and supervisory guidelines, where appropriate. For instance, there must be written (and monitored) appraisal review procedures to ensure that, where appropriate, a lender’s appraisals are consistent with the standards of Uniform Standards of Professional Appraisal Practice (USPAP), appraisal regulations, and supervisory guidelines. 

And, importantly, management has the responsibility, at least on an annual basis, to review the company’s appraiser independence policy and procedures to ensure that they meet the needs of the lender’s mortgage lending activity. 

You ask, what are some of the pitfalls to watch for in compromising appraiser independence? 

There are so many such pitfalls, I would be remiss to endeavor to offer a full slate of them. However, surely, the following list will get you started. You should check the Home Valuation Code of Conduct and Regulation Z for further details. However, the following suggestions are usually in the regulators’ purview to ferret an undue influence on an appraiser. 

Unduly Influencing an Appraiser – Some Pitfalls 

A residential mortgage lender or originator must not: 

- Imply to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a dwelling. 

- Exclude an appraiser from consideration for future engagement because the appraiser reports a value that does not meet or exceed a minimum threshold. 

- Withhold or threaten to withhold payment or partial payment for an appraisal report because the appraiser does not value a dwelling at or above a certain amount. 

- Condition an appraiser’s compensation on loan consummation. 

- Attempt to influence an appraiser by withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser. 

- Attempt to influence an appraiser by expressly or impliedly promising future business, promotions, or increased compensation for an appraiser. 

- Attempt to influence an appraiser by conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion or valuation to be reached, or on a preliminary estimate requested from an appraiser. 

- Attempt to influence an appraiser by asking the appraiser to provide an estimated, predetermined or desired valuation in an appraisal report before completion of the appraisal report, or requesting the appraiser to provide estimated values or comparable values or comparable sales at any time prior to the appraiser’s completion of an appraisal report. 

- Attempt to influence an appraiser by providing a minimum reported, anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, other than a copy of the sales contract for a purchase transaction. 

- Attempt to influence an appraiser by providing stock or other financial or non-financial benefits to an appraiser, appraisal company, appraisal management company, or any entity or person related to the appraiser, appraisal company, or appraisal management company. 

- Allow the removal of an appraiser from a list of qualified appraisers without prior notice to the appraiser, including written evidence of the appraiser’s illegal conduct, a violation of the USPAP or state licensing standards, substandard performance, improper or unprofessional behavior, or other substantive reason for removal. This prohibition does not preclude the management of appraiser lists for bona fide administrative reasons based on written management-approved policies. 

- Order, obtain, use or pay for a second or subsequent appraisal or automated valuation model in connection with a mortgage loan unless the lender has a reasonable basis to believe that the initial appraisal was flawed or tainted and that basis is clearly and appropriately noted in the loan file or unless the appraisal or automated valuation model is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control process or underwriting guidelines, and the lender adheres to a policy of selecting the most reliable appraisal rather than the appraisal that states the highest value. 

Concerning the Home Valuation Code of Conduct, be advised that it is not a complete list of prohibited activities. Other practices are not specifically listed but are also considered an attempt to compromise appraiser independence. For instance, these should also be prohibited:

- Asking an appraiser to remove details about the material condition of the property, to avoid problems in qualifying certain types of mortgage loans, or

- Threatening to place an appraiser on a “blacklist” (i.e., an exclusionary list), sometimes used to blackball appraisers, for refusal to hit a predetermined value. 

Notwithstanding the above prohibitions, you may ask an appraiser to consider additional information about a dwelling or comparable properties. A lender may ask an appraiser to provide additional information about the basis for a valuation or correct factual errors in a valuation. On a case-by-case basis, a lender may also withhold compensation for breach of contract or substandard performance as provided by contract.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

Material Risk from Vendors

QUESTION
Our vendor management policy covers a lot of review criteria to decide if a service provider presents a risk to our company. As the Chief Compliance Officer, I have thought that we are weak in handling such risks. 

Recently, this issue came to a head when I determined that a vendor’s system was failing and posed a material risk. After considerable review, I decided the relationship must end. Although I thought we were adequately covered for responding to material risks, it seems otherwise. 

And I have also gotten a huge amount of pushback from one of our departments since they claim to be dependent on this vendor. They are demanding that I keep the relationship and allow this service provider to stay active. 

What type of review is involved in determining material risk? 

In the face of substantial material risk, what should I do to keep the relationship active? 

ANSWER
I understand the challenge. I really do. You may have gotten pushback, but compliance and diplomacy are sometimes at odds. There is a diplomatic way of enforcing compliance. The best way is to present the evidence in support of your decision. Most people can recognize a threat, especially a material risk, which could affect the company's overall risk profile. You can take the position that an explanation is not needed. But that won’t work in the long run. Your colleagues, both rank and file, are your eyes and ears, and you want them to keep you informed. You want them to recognize your total commitment to complying with banking law. 

Our Vendors Compliance Group (VCG) gets calls all the time from clients who are confronted with the potential for significant material risk posed by service providers. Our approach to vendor due diligence is hands-on, which means we actually do the actual work of personally reviewing each vendor’s documents and history, and then we issue a report. So, clients intuitively come to us to discuss their concerns, knowing that we are already familiar with their level of risk tolerance. If you want to discuss your vendor due diligence needs, please click here. We will contact you promptly. 

I could write a treatise on the definition of “material risk.” Often, the term is defined in the relationship agreements between an organization and the vendor. Let’s keep the definition short for the sake of brevity: “material risk” as a designation in the regulatory context means anything that has a substantive impact on an organization's overall risk profile, such that the risk criteria are significant enough for the source of the risk to be managed deliberatively. Well, I guess that was not so brief, but I did say I could write a treatise on just the definition itself! 

From the regulatory point of view, certain kinds of material risks are dauntingly threatening to a financial institution. I think there are at least four ways to respond to this threat level, and especially when a vendor presents high material risk, to wit: 

1. Assessing the vendor's capacity to perform the assigned task in a compliant fashion;   

2. Seeking representations and warranties from the vendor regarding compliance with applicable laws and regulations;   

3. Seeking the right to audit the vendor's compliance with applicable laws and regulations; and,

4. As appropriate, engaging in training or other activities designed to inform vendors about compliance issues of the organization.

I am going to each of these responses in numerical order. 

1. Assess the vendor's capacity to perform the assigned task in a compliant fashion. 

Outsourcing arrangements, such as vendor relationships, are central to many business activities. While these arrangements can be highly beneficial, they also present significant compliance risks. The vendor's activities may be attributed to the organization, resulting in it being exposed to regulatory sanctions. 

Vendors may also have access to nonpublic information (NPI) obtained from an organization, exposing the organization to the risk that the vendor will commit data breaches or violations of privacy requirements. 

Sometimes, there are business partnerships involved that are technically vendor relationships too. Valuable as such partnerships can be, they also expose organizations to significant risks of compliance breakdowns caused by the business partner. Accordingly, business partner relationships present critical compliance challenges for organizations. 

An essential step in dealing with these challenges is to assess the vendor's capacity to perform the assigned task effectively and reliably. This assessment process involves both a review of the counterparty's potential vulnerabilities and the organization's vulnerabilities. In my experience, a compliance breakdown is most likely when the shortcomings of both parties create gaps in controls that allow violations to occur. 

In assessing a proposed vendor in the context of material risk, you can review a variety of information, including on-site due-diligence examinations; checklists and evaluation tools: interviews with a proposed counterparty's key personnel; analysis of the proposed counterparty's information-security plans and procedures; and review of audit reports and certifications maintained by the proposed counterparty. Always maintain records of this vetting process and the reasons for selecting a vendor or business partner. 

2. Seek representations and warranties from the vendor regarding compliance with applicable laws and regulations. 

Your organization should, as appropriate, seek representations and warranties concerning the vendor's compliance with applicable laws and regulations. These may include representations regarding the vendor's compliance policy and program, internal controls, compliance training programs, and other matters. The representations can include affirmations by the counterparty that it complies with applicable laws and regulations and commitments to notify the organization if the vendor is charged with violations in the future. You may also want to seek an obligation by the counterparty to promptly repair or remediate failures in the vendor's system that may subject the organization to compliance liability. 

3. Seek the right to audit the vendor's compliance with applicable laws and regulations. 

The organization confronted with significant material risk issues may seek the right to monitor the vendor's compliance with applicable laws and regulations. The subject matter to be observed - and the monitoring methodology - depends on the facts and circumstances and should be designed according to a compliance risk assessment. If you do not have such a risk assessment, my firm provides such assistance. Please click here for information. 

In certain cases, it is sufficient for an organization to require the counterparty to keep books and records of services rendered and make these available for review. In other cases, the organization may need to engage in more intensive monitoring, for example, by obtaining the right to receive reports of auditors of the counterparty. And there are cases where an organization may seek the right to perform on-site audits of the provider's internal controls and procedures. 

Whether the organization needs and can obtain such contractual commitments depends on factors such as the criticality of the vendor's services, the costs of complying with the contractual terms, the risks to the organization of a breakdown in the vendor's internal controls, the requirements imposed by the organization's regulators, and the size and bargaining power of the organization. 

It is possible, though, that difficult questions may arise when your organization discovers shortcomings or failures in the vendor's internal controls that pose a risk of potential compliance exposure to your company. A vendor’s system failures can adversely impact a company’s operations and financial stability and immediately reach regulatory scrutiny. In these cases, an organization may be entitled to treat these failures as a material breach, thus terminating the contract. 

But the organization may not be able to terminate the contract, either because the breach is not material or because the vendor's services are critical to the organization's activities and no alternative provider is available. In such cases, the organization may elect to allow the vendor time to repair the problem. Still, it should exercise continual scrutiny to confirm that the repairs are effective and completed quickly. 

Furthermore, your company may also determine whether the counterparty has brought the shortcomings or failures to the attention of the counterparty's regulator and, if so, what the regulator has done in response. At the same time, you will want to consider whether your company is obligated to inform your regulator of the issue or, indeed, whether it would be advisable to notify the regulator even if such disclosure is not legally required. 

4. As appropriate, engage in training or other activities designed to inform vendors about compliance issues of the organization. 

Finally, it may be advisable for the organization to provide training to the vendor's employees. Training by the organization is likely to be more effective than training by the counterparty because it is aware of its risk profile and specific concerns. The costs of such training would be allocated between the parties under the terms of their contract or master agreement.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group