The National Reverse Mortgage Lenders Association (NRMLA) has issued a new advisory opinion sponsored by its ethics committee and Board of Directors which encourages reverse mortgage industry participants to adhere to the association’s code of ethics when cultivating new professional partnerships, particularly in light of new and emerging types of fraud that can take advantage of more technology and automation in mortgage processes and services.
The opinion’s prudence rests in the fact that the reverse mortgage industry primarily serves people at or over the age of 62, given that the vast majority of industry activity takes place within the purview of the Home Equity Conversion Mortgage (HECM) program administered by the Federal Housing Administration (FHA).
According to data from the Government Accountability Office and cited in a report issued by the U.S. Senate Special Committee on Aging, seniors lose nearly $3 billion a year due to financial exploitation of some kind, though that figure is likely a conservative estimate considering that such crimes are largely believed to be underreported.
The advisory opinion from NRMLA
NRMLA published its advisory opinion on May 23 and issued a notice to its membership via an email alert on June 6. Because of emerging technology that can integrate certain mortgage services, highlighting the unique ways that these realities can affect reverse mortgage professionals and borrowers is necessary, the association said.
“The advisory opinion explains that evolving technology and automation in the mortgage business has led to more complex varieties of mortgage fraud that pose a financial risk to NRMLA members and reverse mortgage borrowers,” the member alert reads. “[The new advisory] suggests that, as a best practice, NRMLA members should utilize processes and tools that can detect and mitigate fraud and material misrepresentation when implementing an overall risk management plan.”
In addition to the detrimental results that fraud schemes can have on seniors and the professionals who serve them, they can also add unnecessary expenses for businesses which can be persistent and difficult to take full stock of, the opinion reads.
“It is often difficult to fully understand and quantify the extent of the fraud and the harm caused,” the advisory reads. “Measuring losses associated with fraud and material misrepresentation is often an inexact process. Typically, the true cost of fraud and material misrepresentation is greater than the direct financial loss, given the time and expense to investigate, loss of productivity, potential legal and compliance costs associated with remediation, and impact on the NRMLA Member’s reputation.”
There are also unique difficulties that the reverse mortgage industry itself could face because of the nature of the product, the advisory explains. Since a reverse mortgage does not require regular payments to be made by the borrower, any fraud or misrepresentation may be difficult to detect prior to the full loan balance coming due when the borrower passes away or otherwise leaves the home.
“Sound risk management principles suggest that processes and tools designed to detect fraud, material misrepresentation, and the adverse activity of non-compliant industry professionals, service providers, and participants are important elements of an effective compliance management system,” the advisory reads.
It is also important for financial institutions and service providers to develop collaborative relationships for the purpose of detecting, assessing and reporting the improper use of a senior’s funds according to regulators, including the Consumer Financial Protection Bureau (CFPB) which oversees the reverse mortgage industry at the national level.
Addressing concerns of senior fraud
When asked about the impetus for issuing this advisory opinion, NRMLA President Steve Irwin described for RMD that the time was simply deemed right to remind members of ways that conduct unbefitting of the association’s code of ethics can be shared and reported.
“Our ethics committee and Board take very seriously — as do I — NRMLA’s Code of Ethics and Professional Responsibility,” Irwin told RMD in an interview. “It was determined that the time is right for reminding our members of ways that fraud and material misrepresentations can be reported, so that the marketplace participants who are doing due diligence on companies and/or individuals have a place to see if there is any such alleged behavior.”
There was no occurrence, pattern or specific loan process that instigated this advisory opinion, Irwin says. Just ensuring that industry participants are doing all necessary due diligence is the end goal, in addition to the existing relationships the association has with regulators at state, banking and federal levels.
“We can confidentially communicate issues or complaints we have seen, but members wanted a place to go where they might find any such potential issues with any of their counterparties,” he says. “Whether it be a vendor, a third-party originator, broker, closed-loan seller, doc prep, all sorts of lender and vendor relationships. This is just part of the due diligence process before members enter into arrangements.”
Tools available for reverse mortgage pros, recent actions to mitigate fraud
NRMLA membership has access to a discount for the licensing of the Mortgage Industry Data Exchange (MIDEX), a service offered by LexisNexis’ Mortgage Asset Research Institute. However, association members are not required to use that service, and members are encouraged to avail themselves of similar services which can offer necessary information.
“We aimed to remind members that they should have risk management plans, counterparty risk management plans, and due diligence procedures all in place as part of standard operating procedures, and those plans should be robust and effective,” Irwin explains. “As our outside counsel Joel Schiffman mentioned when he was presenting this at our conference out in Irvine, if members see something that is counter to the Code of Ethics, then they should say something and report as appropriate.”
Earlier this year, the U.S. Department of Housing and Urban Development (HUD)’s Office of the Inspector General (OIG) issued a fraud bulletin about methods that fraudsters might use to gain access to seniors’ finances through some kind of association with the reverse mortgage product. It describes for people that reverse mortgages are legitimate products offered under the FHA’s HECM program, but that bad actors may seek to scam a senior out of money under the guise of offering a reverse mortgage on their home.
Last month, federal legislators also aimed to address instances of senior fraud by passing the Empowering States to Protect Seniors from Bad Actors Act in the U.S. House of Representatives by a vote of 371-48, according to reporting by CNBC. The measure has since moved to the U.S. Senate.