Consumer Financial Protection Bureau and Reverse Mortgage Advertising
Reverse mortgages are marketed to senior homeowners. These advertisements can be found on many major media channels including print, television, radio and internet. Oftentimes the advertisements feature celebrity spokespeople who describe these Reverse Mortgage loans in glowing terms.
The Consumer Financial Protection Bureau (CFPB) recently issued a report, based on their review of such advertisements. They examined marketing materials from a cross-section of lenders in five large urban U.S. markets. Among the CFPB’s findings:
Many of the ads were confusing and incomplete. They provided inaccurate information about borrower obligations, interest payments, government insurance, and general loan risks. In addition, many seniors who viewed the ads as part of the study’s focus groups were confused or had misconceptions about many of the features and terms of reverse mortgage loans.
For example, the CFPB study revealed that it was not clear to potential borrowers that the Reverse Mortgage must be repaid with interest. In addition, the role of the federal government, as an insurer of the reverse mortgage, was not understood, and many of the ads’ viewers believed, after watching the commercials, that the government offers protections for loan consumers that it, in fact, does not.
The report raised concerns among consumer advocates, specifically advocates for seniors. Reverse mortgages are complex loans and older, financially vulnerable homeowners can become trapped by the loan if they don’t understand all of their responsibilities under the loan and the loan’s implications. Reverse mortgages can help many older homeowners meet their financial needs. However, if used improperly, a reverse mortgage can jeopardize retirement security.
Reverse mortgage marketing promotes the use of mortgaging home equity as a way to supplement retirement income. It is, however, important that the advertisements not confuse or mislead prospective reverse mortgage borrowers, and that potential borrowers be fully aware of the terms and potential risks of the loans. In addition, there are costs to the loan which are not always spelled out. It can be difficult for even sophisticated consumers to estimate and understand the full implications of a HECM loan.
With the release of the report, the U.S. Department of Housing and Urban Development (HUD) began to take steps to address misleading or incomplete reverse mortgage marketing practices. HUD’s Mortgagee Letter 2014-10 (ML 2014-10), released in June of 2014, reminds lending institutions of the Federal Housing Administration’s (FHA) prohibitions of misleading or deceptive advertising.”
ML 2014-10 clarifies that the there are FHA prohibitions on using misleading or deceptive descriptions of Reverse Mortgages, also known as Home Equity Conversion Mortgages (HECMs).
The CFPB would like to see the following issues addressed:
1.The HECM loan is a LOAN, and, as with any loan, must be repaid. In the case of a HECM loan, the loan must be repaid when the borrower dies or leaves the property.
2. The borrower accepts obligations to maintain the loan. The borrower must commit to paying property taxes, homeowner’s insurance, home maintenance and the loan’s interest payments. If the borrower does not maintain these payments, the loan may fall into default and the lending institution may foreclose.
3. There are third party costs to the loan, such as title search, origination fee, third party closing costs (title insurance, appraisal, recording fees, etc), In addition, a credit check is done for every loan applicant, and the applicant must pay for this process as well.
4. Non-borrowing spouses may not automatically assume that they will stay in the home upon the death of the borrowing spouse. Presently, the process that a non-borrowing spouse must undergo to stay in the home is unclear and the matter is in the courts. It’s safe to say, however, that right now, the position of a non-borrowing spouse is not defined and the spouse’s position is shaky, at best.