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July 10, 2009 |
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Unsuitable Annuities Tied To Reverse Mortgages |
As more financial advisors sell insurance, a recent report indicates some could be unsuitably cross-selling annuities in conjunction with reverse mortgages.
The U.S. Government Accountability Office (GAO) report, requested by Sen. Claire McCaskill (D-MO) and released in June, cites recent cases in which reverse mortgages were sold to seniors to get them to inappropriately invest in annuities.
A reverse mortgage, generally limited to persons at least 62 years-old, is similar to a home equity loan or credit line. But the borrower needs no income to qualify. Typically, the loan needn’t be repaid until the borrower moves, sells the home or dies.
Nearly all reverse mortgages are “Home Equity Conversion Mortgages (HECMs),” administered by the U.S. Department of Housing and Urban Development (HUD).
Under the Housing and Economic Recovery Act of 2008, a lender or anyone else can’t require a HECM borrower to purchase insurance, an annuity or similar product as a condition of obtaining the HECM.
Plus, a lender can’t be associated with any other financial or insurance product. If he or she is, firewalls and other safeguards must be maintained to ensure that employees originating HECMs don’t also sell other financial products.
HUD is developing regulations to implement these provisions.
In the meantime, eight of 29 insurance regulators responding to GAO reported that from 2005 through January 2009, they had at least one case of an insurance agent selling an unsuitable insurance product that a consumer had purchased using reverse mortgage funds. Of those, four said their states took action.
The report cited these cross-selling cases that had actual or potential violations of state insurance laws:
In Hawaii, an independent mortgage broker, who owned his own insurance company, was prosecuted for deceiving 15 clients. He included paperwork for an annuity in HECM closing documents without their knowledge and collected fees from both sales.
In Maine, an insurance company sales manager arranged for a large reverse mortgage lender rep to speak with his sales agents about reverse mortgages. They later referred 14 clients to the reverse mortgage lender. All obtained reverse mortgages. One 81 year-old widow was sold a deferred annuity that earned only 3.25%, purchased with her reverse mortgage, which charged 4.12%.
In California, two insurance agents allegedly designed a seminar to teach licensed insurance and real estate agents. They are charged with teaching agents to convince senior homeowners that purchasing an annuity with reverse mortgage funds is a condition for obtaining that loan.
These examples may just be the tip of the iceberg on unsuitable reverse mortgage cross-selling. FINRA, according to the report, doesn't track the origin of funds for unsuitable annuity sales. And 14 of 29 insurance regulators responding said they lacked searchable complaint databases.
The GAO report also calls for improved controls over HUD reverse mortgage counseling, and it detailed deceptive reverse mortgage marketing claims.
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