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 and Maryland.
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 the state?
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 already learned.
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 time.
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]