The National Reverse Mortgage Lenders Association (NRMLA) has released Ethics Advisory Opinion 2011-02 on the Ethical Refinancing of Reverse Mortgage Loans. The new advisory is based upon the Value of Fairness within the Code of Ethics that dictates NRMLA members "provide to consumers only products and services that they have determined may provide a 'bona fide advantage' to consumers."
The purpose of the Advisory is to provide specific guidance on whether refinancing an adjustable rate reverse mortgage to a full draw fixed rate mortgage may provide such "bona fide" advantage to senior homeowners. The failure to appropriately make this determination, or to make it incorrectly is considered unethical conduct under the Code of Ethics. Such actions are subject to action by the President and the Ethics Committee as ascribed in the Code of Ethics.
A bona fide advantage to the borrower in this scenario is considered to generally be when the refinance "may provide to the senior consumer cash in the amount of a full draw that the senior consumer actually and reasonably wants, at a reasonable cost to the senior consumer."
The Advisory provides two examples of the type of scenarios that originators face in determining whether the refinancing of a reverse mortgage is ethical. In the first example, a borrower has an existing line of credit on their reverse mortgage of $80,000 which meets her goal of maintaining an available reserve of funds. A refinance is able to provide her with an additional $17,000 in a full draw fixed reverse mortgage. Although she increases her proceeds, she does not have a need to draw the full amount available and the refinance increases her interest rate and annual mortgage insurance premium, along with adding new loan costs. Since she has no immediate need for the full draw of her proceeds, this refinance is considered unethical.
In the second example, the borrower, who has a home valued above the current lending limit, took out his reverse mortgage that was taken out prior to the increase in the national lending limit. The refinance would offer a considerably higher maximum claim amount, which would substantially increase his available proceeds from the reverse mortgage. The borrower is seeking to make improvements to the home and provide for the relocation of the care giver. Such an example could also include paying off high cost unsecured debt or other unexpected expenses. In this example, the costs associated with the refinance do provide a bona fide advantage to the borrower and the refinance is considered ethical under the Advisory.
The Advisory suggests that NRMLA members who refinance reverse mortgage loans, either directly or indirectly, should document the basis for their determination on the appropriateness of the refinance.