JUL 5, 2012
Compliance Matters

CFPB Targets Reverse Mortgage Disclosures

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CFPB TARGETS REVERSE MORTGAGE DISCLOSURES AND MAY START LEANING ON BROKER ADVERTISING

FACTS

The Consumer Financial Protection Bureau is planning stronger disclosure requirements for reverse mortgages as more evidence emerges that senior citizens are using the product without fully understanding its main features and risks.

As part of a Dodd-Frank Act requirement, the agency has released a study showing signs reverse mortgages are not being used as intended, with increasingly younger borrowers taking out larger pots of money rather than gradual income streams to help finance their later years.

The bureau found that 73% of borrowers last year accessed nearly all or almost all of their home equity available in the reverse mortgage—an increase of 30 percentage points since 2008—leaving few funds available later in life.

Nearly half of borrowers were younger than 70 and taking out a loan at the earliest eligibility (typically age 62) has become more common. The study found the biggest players in reverse mortgages currently are nonbanks, and the sector is "increasingly dominated by small originators." The two largest providers, Wells Fargo and Bank of America, left the market last year and MetLife left it in April.

The market has become much more heavily dependent on mortgage brokers and small correspondent lenders," the study said. Taking all the equity available creates problems later on to pay off taxes and insurance related to their home. However, the borrower still remains responsible for paying property taxes and homeowner's insurance, which can cause real problems, including loss of the home if plans are not in place to continue meeting those obligations each year.

Products such as reverse mortgages transferring "a large lump of money" to seniors "can pose special dangers, making elderly borrowers into attractive targets for unscrupulous salespeople and scam artists who peddle products unsuitable to their situations."

CFPB policy related to reverse mortgages will likely focus on disclosure. The bureau is planning a project to "improve and integrate" disclosure requirements under the Truth in Lending Act and Real Estate Settlement Procedures Act specifically related to reverse mortgages. One suspicious mailer characterizing a reverse mortgage as a government benefit, and claiming a "phony" piece of legislation would help seniors keep their homes. The mailer also contained blatantly false information about loan repayment options. (cfpb62812)

MORAL

I can see where we will be defending a lot more people in the near future that are using reverse mortgages say like right next to an annuity office?

MANY LOAN ORIGINATORS ARE TELLING REVERSE MORTGAGE BORROWERS THEY CANNOT DEFAULT ON THE LOANS; THIS IS NOT TRUE AND COULD LEAD TO LITIGATION AND POSSIBLE CLASS ACTIONS

FACTS

While it is true that reverse mortgage borrowers do not have pay back the mortgage and the mortgage does not have to be paid except on death or what amounts to permanent leaving of the residence, the reverse mortgage borrower can still breach the mortgage agreement.

Most, if not all of the reverse mortgages provide that the borrower must pay the homeowners insurance and the property taxes timely. If a reverse mortgage borrower takes the full amount of money available at the time of the loan it is more likely than not, there are no reserves built up to take care of these two matters. Thus having spent the money, the borrower cannot afford to pay the property taxes and/or the homeowners insurance and is in default on the note, thus allowing the mortgage holder to foreclose because the security is in jeopardy.

MORAL

At a minimum prepare a disclosure to warn the borrower of this possibility and of the responsibility to keep the insurance and taxes current and have the disclosure signed and notarized for your own protection. Remember, there are plenty of lawyers out their ready to sue for failure to warn of disclosures and this is a good one. There is another solution as well. If you need legal advice on this issue contact me.

THE DESIGNATED OFFICER OF A CALIFORNIA CORPORATE REAL ESTATE BROKER MAY NOT BE HELD LIABLE BY THIRD PARTIES FOR ALLEGED FAILURE TO SUPERVISE CORPORATE EMPLOYEE

FACTS

Bernard and Linda Sandler sued 765 South Windsor LLC, Gold Coast Financial, a real estate brokerage corporation, and Carlos Sanchez, Gold Coast’s designated officer/real estate broker.

The complaint alleged that Keith Desser, a real estate salesperson, who was the sole shareholder of Gold Coast and the principal of the South Windsor, LLC solicited the Sandlers to loan $600,000 to South Windsor to finance improvements to an apartment building to convert units to condominiums. Further that Desser failed to reveal that the loan amount was insufficient to finance the necessary repairs.

The complaint further alleged that Sanchez as the designated officer of Gold Coast owed a fiduciary duty to the private lenders (Sandler) under the Real Estate Laws and it failed to supervise Desser. The Sandlers further claimed that if Sanchez had done his job, he would have learned of Desser’s misrepresentations and either disclosed them or cancelled the loan transaction. Sanchez demurred to the complaint which was granted holding that Sanchez as designated officer owed no duty absent allegations that he personally participated in the wrongful conduct. The Sandlers appealed.

Comments (3)
The disclosures are a good idea, I believe, and I specialize in reverse mortgages. The company that I work for discloses all of this right up front and attempts to counsel borrowers regarding these matters, but I have heard horror stories. Not that I think the CFPB is the authority on what elderly America is struggling with right now, but somebody's head is in the right place on this particular issue.
Posted by Glenn Joyner | Friday, July 06 2012 at 3:33PM ET
Just have to watch the wording in advertising.
Posted by Jon Thibault | Sunday, July 08 2012 at 5:19PM ET
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