Advocates urge CFPB to protect seniors from reverse mortgage abuses
Washington, D.C. – A new study released by the Consumer Financial Protection Bureau found that many advertisements for reverse mortgages contain incomplete or inaccurate information that can pose a serious risk to seniors who take out such loans. The study was issued in conjunction with an advisory to consumers warning them to “watch out for misleading and confusing reverse mortgage advertisements.”
Consumers Union and Californians for Nursing Home Reform praised the CFPB for alerting seniors about the deceptive ads and urged the consumer watchdog to adopt reforms to protect seniors from reverse mortgage abuses.
“These ads paint a misleading rosy picture about reverse mortgages that may lead some seniors to make poor choices and jeopardize their retirement security,” said Norma Garcia, senior attorney for Consumers Union, the policy and advocacy division of Consumer Reports. “The CFPB should take additional steps to make sure seniors are protected from reverse mortgages abuses and get all the information they need to make the choice that’s right for them.”
Reverse mortgages enable borrowers who are 62 or older to obtain income through cash payment or lines of credit by tapping the equity in their home. The reverse mortgage loan becomes due when the borrower dies, leaves the home for 12 consecutive months or more, or fails to maintain the property or pay homeowners insurance or property taxes. Borrowers must pay a loan origination fee, closing costs, and compounding interests on the loan principal, which can be significant.
The CFPB reviewed nearly 100 reverse mortgage ads and conducted focus groups with seniors to gauge their understanding of the claims made in the ads. It concluded that the ads may cause some seniors to underestimate the risks and take out a reverse mortgage that may not be right for them. As a result they could end up running out of money or even lose their homes by running afoul of the complicated terms of the loan.
Consumers Union and Californians for Nursing Home Reform have urged the CFPB to require lenders to give prospective borrowers a self-evaluation worksheet before the mandatory counseling session so they can consider key issues that will help them decide whether a reverse mortgage is right for them. California already requires this worksheet. The worksheet requires the consumer to take a moment to think about what they are about to do instead of skimming over a written disclosure.
“A worksheet that calls for critical reflection works better than disclosures,” said Prescott Cole, Californians for Nursing Home Reform senior attorney. “Recent scientific brain studies indicate that in real life situations disclosures do not enhance a purchaser’s understanding of the suitability of a purchase, however, worksheets designed to require thought about the suitability of the purchase does.”
In addition, Consumers Union and Californians for Nursing Home Reform called on the CFPB to take a number of additional steps to protect seniors, including:
Require lenders to give borrowers a reversed mortgage worksheet: Lenders should be required to give prospective borrowers a self-evaluation worksheet before the mandatory counseling session so they can consider key issues that will help them decide whether a reverse mortgage is right for them. California already requires this worksheet, which helps to alert borrowers to issues they may want to get advice about during the counseling session.
Ensure loans are suitable for borrowers: Lenders and brokers should be required to consider whether the loans put borrowers at risk of losing their homes, if the borrower understands the complex nature of the contract, and if there are more viable alternatives available to the borrower.
Establish a fiduciary responsibility for the loan: Lenders and brokers must be required to act in the best interests of the borrower and should be held liable for violating this fiduciary duty.
Outlaw deceptive marketing: All reverse mortgages should be required to include information to help borrowers determine whether the loans are suitable for them.
Adopt stronger prohibitions on cross promotions: Prohibitions against cross promotions of other financial products by lenders and brokers should extend to non-HECM loans. Insurance agents and brokers should be held liable for selling an annuity when it is purchased with reverse mortgage funds.
Strengthen the quality and content of counseling: HUD counselors should be required to hold an in-person session with prospective borrowers to determine whether a reverse mortgage is suitable for the borrower. The counselor should deny a counseling certificate to the borrower if the loan is not in the best interest of the senior.
Protect non-borrowing spouses and tenants: Spouses and tenants whose names are not on the reverse mortgage loan should be notified about their limited rights to remain in the home after the borrower dies or permanently moves out of the home.