Forward on reverse--Reverse mortgage law: What you need to knowâ€”Part two Atare E. Agbamuregulatory compliance, reverse mortgages, James Milano
The following is part two of an interview with James M.
Milano, a regulatory compliance attorney with the Washington,
D.C.-based law firm Weiner Brodsky Sidman Kider PC, one of the few
law firms in America with legal expertise and extensive experience
in the reverse mortgage area, including counsel to the National
Reverse Mortgage Lenders Association (NRMLA) and outside counsel to
a number of reverse mortgage companies.
Mr. Milano is a genial and familiar presence at NRMLA events
around the country, making presentations, participating in panel
discussions, and giving updates on compliance issues facing the
reverse mortgage industry.
A graduate of Louisiana State University and the Paul M.
Hebert School of Law at Louisiana State, Mr. Milano earned a Master
of Law degree from Emory University in Atlanta. He is a member of
the American Bar Association and its Consumer Financial Services
Subcommittee. He is also a member of the bar in the District of
Columbia and several states, including Louisiana, Georgia, Virginia
Mr. Milano is active in several trade associations such as
NRMLA, the Mortgage Bankers Association, the MBA of Metropolitan
Washington, D.C., the Conference on Consumer Finance Law, and the
Manufactured Housing Institute Finance Lawyers Committee, of which
he was former chair and co-chair.
Atare E. Agbamu: Should the training of new reverse
mortgage loan officers include legal compliance topics?
James M. Milano: Definitely yes! Why? Because
non-compliance can become costly. It can cause companies to suffer
regulatory fines on audit by their state regulators. Worst-case
scenario, it can cause companies to lose their lending license,
thus making them unable to operate and do business. Another area:
If you are a correspondent or U.S. Department of Housing and Urban
Development mortgagee and you are not in compliance with HUD/FHA
requirements, you can originate loans that are uninsurable. The
cost of non-compliance can be high. So, it should definitely be
part of the training and orientation of new loan officers.
AEA: What is the legal status of the HUD Mortgagee
JMM: That's a good question. I'm not sure I know the exact
answer, but I can tell you that courts, in the past, have given
deference to HUD regulations. While Mortgagee Letters are not
regulations, the practical effect of not following a Mortgage
Letter may be that HUD refuses to insure the loan that you
originate. Therefore, the common sense answer is that Mortgagee
Letters should be followed as if they have the force of law.
AEA: As a real estate attorney with a national
perspective, what specific state laws should reverse mortgage
marketers and originators be aware of?
JMM: One set of laws that reverse mortgage originators
should be aware of are not specific to reverse mortgages, but apply
across the boardstate mortgage licensing laws. Reverse mortgages
are, first and foremost, mortgages. Those who originate such
mortgages must typically be licensed at the state level unless they
qualify for some exemption.
This is the first thing people should be aware of. The second
thing is that some states have specific reverse mortgage laws,
including North Carolina, Rhode Island, New York, West Virginia and
Nebraska. If a reverse mortgage lender is doing business in North
Carolina and is not otherwise exempt, in addition to a North
Carolina state mortgage lending license, it must obtain a specific
North Carolina reverse mortgage approval from the Commissioner of
Banks. In North Carolina, this additional approval applies to
lenders, but not necessarily brokers. So, it depends on what
activities the originator is conducting. New York and West Virginia
have specific laws that apply to reverse mortgages, but these laws
generally dont apply to HECMs. So, there are specific laws in these
states, but if the lender is only doing HECMs, it typically won't
have to worry about them.
Other laws may apply more generally. For instance, Rhode
Island's mortgage laws provide special challenges on lien-ranking
issues for reverse mortgages. A similar problem exists in Nebraska.
I don't want to go into a lot of detail, other than to say these
are just examples of how certain state laws can specifically apply
to reverse mortgages. There can be approval requirements; there can
be terms and conditions requirements; there can be lien-ranking
requirements that may or may not apply to an HECM because it is
governed by the federal HUD requirements.
AEA: So, a general caution would be to pay attention to
your state mortgage laws?
JMM: Originators should check with an attorney. Ask them,
"Is there anything else I need to know?" The questions should be
threefold: Do I need approval to do reverse mortgages specifically?
Are there any reverse mortgage-specific disclosure requirements
that I need to know about? Are there any specific provisions that
need to be in loan documents for reverse mortgages originated in
AEA: What is the federal law that specifically restricts
HECM loan proceeds from being used for estate planning service
firms? As you are aware, there are a lot of brokers and lenders who
try to enlist financial planners, elder law attorneys and others in
their referral/marketing partnerships.
JMM: The law is under the HUD/HECM Regulations. In order
for an HECM to be eligible for insurance, a borrower must establish
to the lender that the initial payment under the HECM won't be used
to pay an estate planning service firm.
There is an additional requirement under the regulations that
provides if the senior requests at least 25 percent of the
principal limit amount to be disbursed at closing, the lender must
make inquiry at closing to confirm that the borrower will not use
any part of the amount disbursed for payments to, or on behalf of,
an estate planning firm.
AEA: In your opinion, what are some reverse mortgage
compliance do's and donts?
JMM: Here are the basics:
•Make sure you are properly licensed (the forward mortgage
license will cover reverse mortgage activity in just about every
•Make sure you are using the proper disclosures. You must
give early disclosures and documents for HECMs, and many state laws
have specific reverse mortgage disclosure requirements;
•Make sure you have a separate independent agreement between
your company and the senior borrower if you are acting as a
non-FHA-approved broker or an advisor.
These are all of the do's if you are in the reverse mortgage
business. The obvious donts would be acting as an advisor without a
written agreement with the senior; not being properly licensed
either generally or under some state-specific reverse mortgage law;
or not using the proper disclosures or documentation.
AEA: What are the greatest challenges facing the reverse
mortgage industry at this time? And what trends do you see in the
JMM: Regarding challenges, I'd say several of the large
reverse mortgage companies have worked very hard to increase
servicing capacity. These companies act as primary sponsors for new
correspondents who want to get into the reverse mortgage business.
As these companies continue to grow and increase capacity, it will
make it easier for correspondents to become involved in the
business. It also seems probableand this is both a trend and a
challengethat over the next year or two, other large companies will
get involved in the reverse mortgage business and offer sponsorship
and servicing for correspondents. I don't know who that's going to
be, but it seems logical because there is such a demand for this
product. Today, I believe there are only two companies that are
sponsoring correspondents and servicing reverse mortgages.
AEA: That's Seattle Mortgage and Financial Freedom,
JMM: I think so. There may be another servicing platform,
but it does not act as a sponsor; it is merely a servicer. So, that
is the first challenge. I say it is a challenge, but I know people
in these companies, and I know what they are doing. They've worked
very hard to increase their customer service to their
correspondents and to expand their servicing capacity.
I think there is an opportunity for at least one, maybe two
other companies to get involved in this business, if they want to.
I think that over the next year, you are going to see at least one
company, maybe two, come into it from the standpoint of acting as a
sponsor and a servicer. These companies are going to have their
challenges also. They will have to learn the business, get up to
speed and figure out everything that the current big players have
So, one challenge is capacity, and I think that people are doing
the best that they can to work through that challenge and increase
capacity. The other challenge is communication between HUD and
industry. HUD has made great strides in focusing more resources on
the HECM business. They've added staff. They've put out many
Mortgagee Letters and regulations recently, addressing several key
aspects of the HECM program including the refinance rule and
counseling. Guidance may soon be released on rate locks and
long-term care premiums. I think HUD continues to make progress in
cooperating with the industry in developing and issuing these new
rules. I think the one area HUD can improve on is communicating
even more closely with the industry, before they issue these
Mortgagee Letters, not after.
As far as trends go, I think the reverse mortgage industry has
experienced exponential growth over the past several years. In
2002, annual origination of HECM loans was, I believe, just below
7,000 loans. This year [2004 fiscal year], the annual origination
could approach 40,000 loans. That's outstanding growth. The number
of mortgage companies offering reverse mortgages will continue to
increase and, correspondingly, the number of reverse mortgages
originated will continue to grow. I think additional features and
benefits will be added to the HECM program. For instance, HUD
recently promulgated the regulations for an HECM refinance. We will
probably see a rule on rate locks sooner rather than later.
Eventually, HUD will get to the long-term care insurance premium
issue, where the up-front mortgage insurance premium is waived for
seniors who use all of the proceeds of an HECM loan to purchase
long-term care insurance. The other trend that may happen in the
reverse mortgage industry (which we have seen with other FHA
products) is that additional conventional products will be
designed. The only other viable product out there is Financial
Freedom's Cash Account. I think people are going to come up with
other products that are not FHA insured. It's just a matter of
AEA: What do you think about a national loan
JMM: I don't know where we are on that. I know we talked
to HUD, and I know there has been an actuarial study that was
mandated by Congress about four years ago. A single national loan
limit may come to pass. It makes sense. But it may take some time
before HUD works it out.
AEA: Do you have any other closing comments?
JMM: I really enjoy the reverse mortgage industry. Though
I am primarily a regulatory compliance residential mortgage lawyer,
out of all the work I do, I really enjoy this industry the most
because the people I have met truly seem to care about seniors and
believe in what they are doing. That really comes across when you
talk with them. They sincerely believe they are helping people, and
that attitude is contagious. By being around those who work in this
business, I get the same feeling myself: I am doing something good
to help seniors.
Atare E. Agbamu, CRMS, is a reverse mortgage consultant with
Credo Mortgage, located in the Twin Cities of Minnesota. Atare is
regarded as an emerging authority on reverse mortgages, and is
frequently consulted by financial professionals and families across
America. His reverse mortgage interviews have been Webcast on
MortgageMag Live! Atare serves on the Board of Little
BrothersFriends of the Elderly in the Twin Cities, and he is a
trustee of The Little Brothers Foundation. He can be reached by
phone at (651) 389-1105 or e-mail [email protected]