Before I even start this article, I want to admit that I have never been through HUD Counselor training and I do not know what the counselors have been trained to say and what not to say. I can say that only last week, HUD came out with a reminder to all reverse mortgage lenders and originators that they were not allowed to become involved in any way with the counseling, including assisting with making the appointment to even recommending a counseling agency.
The idea behind the mandate is simple; reverse mortgage counseling is to remain a completely neutral third party that the borrower contacts only on their own volition if and when they want to proceed, performed by a counselor who is not in any way beholden to a company for referrals so that the counseling that the borrower receives is completely non-biased and is done solely for the good of the borrower. But what happens when the counselor is poorly trained, is not familiar with current lending products, and doesn’t know how bad the information is that they are giving the borrower?
Now in all honesty, most of the counselors with whom we have worked over the past 10 years have been very knowledgeable individuals or were willing to admit when some things were out of their area of expertise. However, this is not always the case and unfortunately, some borrowers have suffered as a result. The latest major set of errors I was witness to was just Friday when a borrower contacted me, grief stricken when she received the information sent to her by the counselor that showed she and her husband didn’t even qualify as our proposal reflected and wanted to know why I didn’t tell them that from the beginning. She said she saw no reason to keep the counseling appointment. I asked her to send me the information she received from the agency because I couldn’t see how that could possibly be the case.
I got her paperwork and could not believe what I saw. I asked her if she told them what program and what interest rate she was receiving from us and she answered “yes, why?”. When examining the paperwork she had received from the counseling agency, the main program they had sent her was a program that had not been available for several years and the Expected Rate at 6.4% with the 4.5% margin they used, the Principal Limit available on that example was well below anything actually available in the market under the Standard Program.
Furthermore, they used a monthly servicing fee (that we currently do not charge on any program) that accounted for a servicing set-aside of over $6,000 as well as an origination fee of $4,400 of which she had neither. In all, their figures were over $25,000 off of her actual net cash available. They repeated their errors in each of the three columns on the Loan Comparison Page, even quoting a servicing fee on the 5.56% fixed rate they used in their last column which was also off by thousands of dollars. The actual program the borrower getting is a 3.99% fixed rate loan with no origination fee and no servicing fee.
The fact that there is no servicing fee or origination fee in and of itself accounts for $10,000 difference to the borrower in this case in their net proceeds, but any time an interest rate is at or below 5% the borrower receives the maximum benefit under the program. Any interest used over that amount as this counselor did in two of the three columns; the borrower receives less money on their eligibility as well. Even though the borrower informed them that they were getting a 3.99% fixed rate, the main program the counselor used was a 1 Year T-Bill (which is not available in the market today). The way the reverse mortgage program works is that the program has both an Initial Rate and an Expected Rate. The Initial Rate is the rate at which you actually accrue interest based on your index plus margin.
The Expected Rate is a longer term index and is one that is believed to be a more accurate indicator over a long period of time of what the index can be expected to reflect. Therefore, your benefit is determined based on the Expected Rate even though this is not a rate at which you ever actually accrue interest. The program that is available in the market today, the 1 Month LIBOR uses the 10-Year LIBOR for the index on the Expected Rate and even that index plus margin is still below 5% for all but a 3.5% margin (the most common current margin available is 2.5%, but lower margins can even be found).
Luckily this borrower called me and I had a chance to calm her and convinced her to call another counselor. Over the years, I have had counselors give borrowers many different pieces of erroneous information, sometimes to the detriment of the borrower. One counselor told a borrower that we were not a HUD approved company and suggested the borrower use another specific company, by name (which is a violation of HUD protocol). When we showed the borrower our name on the HUD website the counselor stated that he was looking for our dba and did not see that – he never did answer the question of steering the borrower to a higher priced lender.
We had one counselor insist on telling the borrower that our fees were too low and that we did not disclose pursuant to RESPA guidelines. I not only wrote to the individual but the manager of the company and showed them that we just underwent a HUD audit in which every Good Faith Estimate and HUD 1 Settlement Statement we produced met HUD guidelines and passed the audit. They stated they did not know, would contact the HUD local office and get back to us. After numerous requests for updates, they never did get back to us with “HUD’s response”.
Finally, we had a counselor who told one of our clients that we could not do a reverse mortgage without an origination fee, that we were not being truthful on our disclosures. When we contacted them and asked them how they possibly came up with that ruling, they said that “all the loans’ they were doing had origination fees except ours – ergo, ours must be wrong.
Unfortunately, this was a borrower who did not know us well, was located across country (as was the counselor) and figured that the counseling agency HAD to know what they were saying and they went with another lender at a higher rate and with an origination fee. This lack of knowledge and then further compounding the error by making an erroneous statement to the borrower will cost this borrower thousands of dollars at origination and many thousands of dollars over time and that’s just not right.
There have been many other mistakes over the years as well. Like any service provider, Counseling Agencies are only as good as the training they receive, the people they hire and the information they provide. Usually, when we provide information about erroneous information provided or not following HUD protocol, management at the counseling agency steps in and does what they can to make things right. Unfortunately though, sometimes they don’t know the right answer and are afraid to admit they did something wrong or they didn’t know the correct response and there never is a resolution to the issue. Most of the time counseling goes off without a hitch and borrowers report a positive experience where they learned a few more things about the program. However, I urge borrowers who receive something from a counselor that just doesn’t add up to do a little more investigation before assuming that the counselor is correct.
The borrowers I described in the circumstance above where the counselor stated that the fees were “too low” and improperly disclosed were extremely wary, but did close their loan and were very happy when they received their final documents only to see that the loan was closed as disclosed. The borrowers who cancelled and went with a higher priced program were not so lucky.
My borrowers from Friday were lucky they caught me just before I left for the day so they did not have to worry any longer when I showed them the differences in the numbers. If you get something from a counselor that looks a lot different than what your lender sent you and you don’t see the difference in the programs yourself, before you panic, give your lender a call and send them the paperwork. If there’s an error on the programs being quoted, they will be able to show you exactly where.
Also in this category:
“Reverse Mortgage Counseling – When a Good Idea Takes a Wrong Turn” By Michael G. Branson