Deceptive and Unfair Practices in the Origination of Reverse Mortgages Loan
Washington’s Consumer Protection Act (CPA), codified in RCW 19.86 et seq., prohibits “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce. As a consumer protection law firm, we represent the victims of unfair and deceptive practices.
We specialize in litigating CPA violations that have occurred in the origination, servicing, and foreclosure of Home Equity Conversion Mortgages (HECM), commonly known as “reverse mortgages”. This first post will provide some background on reverse mortgages and CPA violations that may occur at origination. Subsequent posts will address possible CPA violations at the servicing and foreclosure stage.
A "reverse mortgage" is a form of equity release in which a mortgage lender (typically, a bank) makes payments to a borrower based on the borrower's accumulated equity in his or her home. Unlike a traditional mortgage, in which the borrower receives a lump sum and steadily repays the balance over time, the borrower in a reverse mortgage receives periodic payments (or a lump sum) and need not repay the outstanding loan balance until certain triggering events occur (like the death of the borrower or the sale of the home).
HECM reverse mortgages are available to elderly homeowners age 62 and older. Because repayment can usually be deferred until death, reverse mortgages function as a means for elderly homeowners to receive funds based on their home equity. Bennett v. Donovan, 703 F.3d 582, 584-85 (D.C.Cir.2013).
As federally insured loans, HECM reverse mortgages are governed by the Home Equity Conversion Mortgage Program (HECM), Section 255 of the National Housing Act (12 U.S.C. 1715z-20) (NHA), the Truth in Lending Act, 15 U.S.C. Ch. 41 § 1601 (TILA), the Real Estate Settlement Procedure Act (12 U.S.C. §§ 2601–2617)(RESPA) and HUD guidelines and regulations, and as such, the origination, servicing and foreclosure of these loans is somewhat more complicated than that of forward mortgages. In addition, Washington has enacted its own reverse mortgage statute in RCW 31.04 et seq., that applies to both HECM reverse mortgages and proprietary reverse mortgages.
Although reverse mortgages may offer a long-term solution to providing financial stability to the elderly who are on a fixed income it has also led to unscrupulous business practices that pray on vulnerable members of our community.
In the mid-late 2000s, HECM reverse mortgages (RM) lenders engaged local mortgage brokers to solicit their mortgage products. One such product is known as the fixed rate RM with a lump sum disbursal, and it was particularly prone to borrowers defaulting on the terms of the mortgage. A fixed rate mortgage means that the interest rate (which for all HECM reverse mortgages is compounding interest) does not change. The lump sum disbursement means the borrower receives the initial principal sum after the loan has been consummated.
The amount a borrower is entitled to received depends on several factors including the borrower’s age, marital status, and the value of their home, and any liens on title. It has been said that a reverse mortgage lives and dies on an appraisal of the borrower’s home. And for good reason. Depending on closing costs, which average around 8% of the loan value, a low property value generally means a lower loan amount, and the inverse is also true.
In 2009, HUD required that HECM reverse mortgage loan originators use only FHA approved appraisers in obtaining an appraisal of the borrower’s home. But, conceivably many lenders did not comply with this requirement around the time it was issued. For example, we assisted one such client where in 2009 a non-FHA appraiser valued her home in Seattle at $600,000.00. But in 2015, an FHA appraiser value the same home for only $585,000.00. This matter because the value of the home determines the amount of the loan.
Executing a reverse mortgage is a complicated affair. The process can take months. Prior to executing any loan agreements, HECM borrowers are required to obtain “adequate” counseling by an independent third-party, from a list generated by the HECM lender of HUD-approved counseling agencies that are neither directly or indirectly associated with her loan transaction. Further, at least one local agency should be located within a reasonable driving distance because the “FHA prefers that all prospective HECM borrowers participate in face-to-face interviews with an HECM lender and counselor.”[1] Counseling is one way the HECM program protects and informs prospective borrowers. The HECM enabling statute details information that must be discussed at counseling, including options other than an HECM and the financial implications of entering an HECM loan. The counselor must also help the homeowner perform a budget analysis based on the borrower’s income, assets, debts, and monthly expenses.[2]
In addition, the Truth in Lending Act (TILA) provides additional protection to borrowers by creating mandatory disclosures for close-end mortgages. Under TILA, a RM lender is required to disclose the total annual loan costs (TALC) (rate) to the borrower at least three business days before the consummation of a closed-end reverse mortgage. “TALC was developed to facilitate comparison of the costs of various loan products to provide consumers with an ‘apples to apple’ way of evaluating and comparing the cost of reverse mortgage alternatives.” TILA also required the lender to disclose the three-day TILA right to rescind.
Additional disclosures are required under Real Estate Settlement Procedure Act (RESPA). A creditor or broker must provide a good faith estimate of costs, fees, and other terms of a mortgage before the earlier of: (1) the extension of credit, or (2) three business days after the creditor receives the consumer’s written application for a residential mortgage loan.[3] Under RESPA, a good faith estimate must contain estimates of certain charges.[4] These charges include payments to mortgage brokers.[5]
The amount of money a mortgage broker may receive is strictly governed by Federal Law. As of November 2008, HECM origination fees are limited to the greater of (1) $2,500 or (2) two percent of the maximum claim amount up to $200,000, plus one percent of any portion of the maximum claim amount that is greater than $200,000.00. But there are ways in which lenders and brokers obviate these requirements through Yield Spread Premiums (YSP). A yield spread premium is a rebate paid to a mortgage broker by a wholesale lender in exchange for closing a loan with a higher interest rate than the interest rate at which the lender was willing to close.
Now going back to reverse mortgages living and dying with an appraisal. In the mid-late 2000s following the mortgage crises, HECM reverse mortgage lenders were still not using FHA approved appraisers. To be cynical and simplistic, there is an industry. The industry is a system. In the system there are players. A mortgage broker contracted by an HECM reverse mortgage lender is given incentives to sell their reverse mortgage products, including the prone-to-default fixed rate lump sum reverse mortgage. The mortgage brokers have a handful of appraisers whom they know to be prone to give higher values to properties. The mortgage broker obtains a high property value, and this forms the basis of the loan amount. The closing on a higher loan amount leads to a higher yield spread premium for the broker. But, a higher loan amount may also lead to a higher risk of default, especially if the loan amount is disbursed as a lump sum. The reason for this is the compounding interest rate may result in a situation where the loan value quickly exceeds the anticipated growth in the equity of the home.
In addition, we have also seen mortgage brokers double dip by charging the borrowers an origination fee, one that complies with the HECM requirements and then also charging the YSP, which may be a few thousand dollars onto to the borrower at origination.
Thus, some typical issues we look for as consumer protection attorneys include, exaggerated appraisals, loan origination costs that violate federal law and are unlawfully paid for from the borrower’s funds, and failure to adhere to the disclosure requirements under TILA and RESPA.
In Washington, one requirement to establish a CPA claim is proving that the defendant engaged in an unfair or deceptive act of practice. Fortunately, in Washington, an act may be shown to constitute a per se unfair or deceptive act or practice when the legislature declares a statute to constitute an unfair or deceptive act or practice, and someone violates the statute.
A violation of the statute relating to consumer loans including reverse mortgages, embodied in RCW 31.04 et sq., is an unfair or deceptive practice in the conduct of servicing a consumer loan secured by real property.[6] The Consumer Loan Act further provides that “[a] violation of federal legal requirements for an FHA-approved reverse mortgage as defined in RCW 31.04.505(1) constitutes a violation of this chapter.” RCW 31.04.535. Therefore, what we interpret this to mean (although the issue to date has not come before the Washington Supreme Court) that a violation of the disclosure requirements under TILA and RESPA constitute per se unfair deceptive acts or practices. As does a failure to disclose to the borrower the total amount a mortgage broker receives from closing the loan, including the YSP. Any amount that exceeds the HECM requirements could conceivably also be a per se violation.
Why does this matter? Not only do reverse mortgages impact the most valued members of our community -our elders- but reverse mortgages are also federally insured. When a loan goes into default, a lender may apply for recovery of some, if not all of the amount the lender fails to recoup from the borrower or the borrower’s estate. Therefore, to hold lenders accountable for unscrupulous practices is to also safeguard that taxes we pay to the federal government.
[1] Dep’t of Hous. & Urban Dev., Mortgagee Letter 2008-08 (April 27, 2008)
[2] Mortgage Lending, § 9.4.1, National Consumer Law Center (1st Ed); Dep’t of Hous. & Urban Dev., Mortgagee Letter 2009-10 (Mar. 27, 2009)
[3] 12 U.S.C. § 2604(c); 15 U.S.C. § 1638(b)(2);12 C.F.R. § 226.19(a)(1).
[4] 24 C.F.R § 3500.7(c).
[5] For all items except for those paid to and retained by the Lender, the name of the person or firm ultimately receiving the payment should be shown.
[6] “The legislature finds that the practices governed by this chapter are matters vitally affecting the public interest for the purpose of applying the consumer protection act, chapter 19.86 RCW. Any violation of this chapter is not reasonable in relation to the development and preservation of business and is an unfair and deceptive act or practice and unfair method of competition in the conduct of trade or commerce in violation of RCW 19.86.020. Remedies provided by chapter 19.86 RCW are cumulative and not exclusive.” RCW 31.04.208.