oversight

Senior Reverse Mortgage Services, Bedford, Texas, Generally Complied with HUD Regulations but Could Improve

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-07-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                     Issue Date
                                                                             July 14, 2008
                                                                     Audit Report Number
                                                                            2008-FW-1010




TO:            Brian D. Montgomery
               Assistant Secretary for Housing—Federal Housing Commissioner, H


FROM:          Gerald R. Kirkland
               Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: Senior Reverse Mortgage Services, Bedford, Texas, Generally Complied with
         HUD Regulations but Could Improve


                                        HIGHLIGHTS

    What We Audited and Why

                 We reviewed Senior Reverse Mortgage Services, Incorporated (originator), a
                 home equity conversion mortgage (HECM) 1 originator. The originator
                 originated loans for one of the largest lenders in Texas, Financial Freedom
                 Senior Funding Corporation (Financial Freedom).

                 Our objective was to determine whether the originator complied with U. S.
                 Department of Housing and Urban Development (HUD) regulations and
                 adequately counseled borrowers and disclosed costs.

    What We Found
                 Generally, the originator complied with HUD regulations when it originated
                 HECM loans. However, the originator could have improved its service by
                 consistently following requirements to (1) adequately disclose the financial
                 aspects of the loans to borrowers, (2) counsel the borrowers on other available
                 financing options, and (3) complete documents. Because the originator did

1
     Also known as reverse mortgages.
           not consistently follow these procedures, borrowers may not be fully aware of
           the financial implications of the loans.

What We Recommend


           We recommend that the Assistant Secretary for Housing-Federal Housing
           Commissioner require the originator to implement procedures that ensure that
           it (1) provides at least two assumptions for at least two loan terms and two
           appreciation rates to borrowers; (2) provides a list of eligible counselors to the
           borrowers so that they can select their counselor; and (3) completes all loan
           documents.

           For each recommendation without a management decision, please respond and
           provide a status report in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us with copies of any correspondence or directives issued
           because of the audit.

Auditee’s Response


           We provided our draft report to the originator on June 3, 2008, and requested
           a written response by June 13, 2008. The originator’s consultant requested an
           extension until July 30, 2008 to respond. After discussion with the originator,
           we issued a revised draft report on June 12, 2008, and requested a response by
           June 30, 2008, which the originator provided on July 2, 2008. We held an exit
           conference on June 20, 2008. In its response, the originator stated it would
           continue to follow HUD and Federal Housing Administration requirements.
           The originator’s response along with our evaluation is included in appendix A
           of this report.




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                         TABLE OF CONTENTS


Background and Objectives                                                      4

Results of Audit
      Finding 1: The Originator Generally Complied With HUD Regulations, but   5
      Improvements are Needed

Scope and Methodology                                                          7

Internal Controls                                                              8

Appendixes
   A. Auditee Comments and OIG’s Evaluation                                    10




                                         3
                    BACKGROUND AND OBJECTIVES

Of the 4,873 home equity conversion mortgage (HECM) loans closed in Texas in 2007,
Financial Freedom Senior Funding Corporation (Financial Freedom) submitted almost half
the mortgages through sponsored entities. These loans total about $460 million. Of the
entities sponsored by Financial Freedom, Senior Reverse Mortgage Services, Incorporated
(originator), originated 33 loans valued at more than $1.9 million with a maximum claim
potential of more than $4.4 million.

A HECM loan, also known as a reverse mortgage, is a special type of home loan that lets
borrowers, 62 years of age or older, convert a portion of the equity in their home into cash.
Unlike a traditional home equity loan or second mortgage, the loans do not have to be repaid
until the borrowers no longer use the home as their principal residence.

The originator began originating HECM loans in 2005 exclusively for Financial Freedom.
Financial Freedom provided the necessary software, training, and other support services to
originate the loans. The originator paid a fee to Financial Freedom for each loan submitted.
The originator obtained borrowers through advertising or referrals. It conducted initial
interviews with the borrowers to determine whether a HECM loan was suitable for them. If
suitable, the originator referred the borrower to a counseling service to schedule a counselor
to counsel the borrower. If the borrower and the originator agreed that a HECM loan would
meet the borrower’s needs, the originator ordered an appraisal and processed the loan
application. The originator is located at 312 Harwood Road in Bedford, Texas.

Our objective was to determine whether the originator complied with HUD regulations and
adequately counseled borrowers and disclosed costs.




                                               4
                                   RESULTS OF AUDIT

Finding 1: The Originator Generally Complied With HUD
           Regulations, but Could Improve
Generally, the originator complied with HUD regulations when it originated HECM loans.
However, the originator could have improved its service by consistently following
requirements to (1) adequately disclose the financial aspects of the loans to borrowers, (2)
counsel the borrowers on other available financing options, and (3) complete documents.
Because the originator did not consistently follow these procedures, borrowers may not be
fully aware of the financial implications of the loans.




    The Originator Did Not
    Adequately Disclose the
    Financial Aspects of the Loans


                  Six of the twelve borrowers that we interviewed said that they did not
                  understand the high fees, the interest costs, or the complicated process. The
                  originator provided the borrowers with an estimate of the future value of the
                  loan using one set of assumptions, such as a 4 percent appreciation rate and
                  the current adjustable interest rate. HUD regulations required at least two
                  assumptions for at least two loan terms and two appreciation rates. 2 The
                  originator should present a range of assumptions in its disclosures and discuss
                  the effect of increased interest rate potential over the life of the loan. 3

                  The originator believed that the 4 percent appreciation rate for the local area
                  was a good estimate. It took the position that it wanted to maximize the
                  proceeds to the borrowers, and it was not concerned with the interest rate
                  since the borrowers did not have to repay the loans. However, some
                  borrowers might want to pay off mortgages or leave part of the equity to heirs.
                  The interest rate impacts the amount required for future repayment; thus, the
                  originator should have disclosed this information to the borrowers.




2
      Section 255 of the National Housing Act and HUD Handbook 4235.1, REV-1, section 4-7 L.
3
      The interest rate can increase as much as 10 percent over the life of the loan.


                                                     5
    The Independent Counselors
    Did Not Adequately Counsel the
    Borrowers


                 Based upon interviews, counselors did not fully inform nine of twelve
                 borrowers of other financing options available and costs associated with those
                 options. Further, two of the twelve clients did not recall speaking with a
                 counselor. All signed a certificate stating that they received counseling. HUD
                 regulations 4 required counselors to discuss other options available to the
                 borrowers including social services, health, and other financing options as
                 well as the financial implications of the HECM mortgage.

                 The originator contracted with a counseling service, which assigned a
                 counselor to the borrower. 5 HUD regulations required the originator to
                 provide a list of eligible counselors to the borrowers so that they could select
                 their counselor. The originator stated that borrowers were free to use any
                 counselor. The originator should have ensured that borrowers were aware of
                 their ability to choose any counselor.

    Incomplete Documents Implied
    Lack of Explanation


                 In a few files, borrowers signed incomplete documents, which implied that the
                 originator did not explain the documents to the borrowers. Also, one appraisal
                 required repairs, but the mortgage was processed without documentation of
                 repairs. These errors appeared to be infrequent and not systemic.

    Recommendations

                 We recommend that the Assistant Secretary for Housing-Federal Housing
                 Commissioner require the originator to

                 1A. Implement procedures that ensure that it (1) provides at least two
                     assumptions for at least two loan terms and two appreciation rates to
                     borrowers; (2) provides a list of eligible counselors to the borrowers so
                     that they can select their counselor; and (3) completes all loan
                     documents.




4
     Section 255 of the National Housing Act and 24 CFR (Code of Federal Regulations) 206.41.
5
     HUD required the originator to pay for the counseling.


                                                     6
                      SCOPE AND METHODOLOGY

Our objective was to determine whether the originator complied with HUD regulations and
adequately counseled borrowers and disclosed costs. To accomplish our objective, we

       •   Reviewed applicable criteria and regulations for HECM loans,
       •   Interviewed 12 borrowers and observed their properties,
       •   Reviewed the loan origination files of 12 loans, and
       •   Interviewed HUD employees regarding the program.

We conducted our audit from February through May 2008 at the originator’s office and our
office in Fort Worth, Texas. Our audit period was from January 1 through December 31,
2007. We expanded the scope as necessary to accomplish our objective. We performed our
audit in accordance with generally accepted government auditing standards.




                                            7
                            INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


               We determined the following internal controls were relevant to our audit
               objectives:

               •   Compliance with laws and regulations—policies and procedures that
                   management has implemented to reasonably ensure that resource use is
                   consistent with laws and regulations.

               We assessed the relevant controls identified above.

 Significant Weaknesses


               A significant weakness exists if management controls do not provide
               reasonable assurance that the process for planning, organizing, directing, and
               controlling program operations will meet the organization’s objectives.

               Our review did not disclose any significant weaknesses.




                                              8
                        APPENDIXES

Appendix A

      AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation       Auditee Comments




                            9
Comment 1




            10
Comment 2




            11
Comment 3




            12
                           OIG Evaluation of Auditee Comments


Comment 1   While the originator used forms provided by Financial Freedom, the disclosures listed
            in its response did not meet all HUD requirements. For instance, the estimated
            amortization schedule disclosed potential total cost at only one assumed appreciation.

Comment 2   During interviews, the borrowers claimed that they did not receive adequate
            counseling. The originator did not address the recommendation that it provide a list
            of eligible counselors to the borrowers as required by HUD. We removed the issue
            pertaining to an out-of-state counselor before we issued the revised draft report;
            however, the originator should ensure that it allows the borrowers to select their
            counselor.

Comment 3   OIG agrees with the lender’s implemented corrective actions.




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