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 was set to release 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.
"Though many older Americans are aware of reverse mortgages, they struggle greatly to understand this complicated product and the tradeoffs involved," CFPB director Richard Cordray said in a conference call with reporters. "They may focus primarily on the amount of money they can garner in the short term, and underestimate the long-term costs and risks."
The bureau, which is required to study the reverse mortgage sector and identify potential consumer protection concerns, 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.
"With their departure, the market has become much more heavily dependent on mortgage brokers and small correspondent lenders," the study said.
Cordray said borrowers who use up all of their home equity earlier may lack the resources later on to pay off taxes and insurance related to their home. "The reverse mortgage product can provide some peace of mind not afforded by other types of loans," he said. "Notably, 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."
He added that products 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."
Reverse mortgage are typically insured through the Federal Housing Administration's Home Equity Conversion Mortgage program. The CFPB study said reverse mortgage originations peaked in 2009 with 115,000 originations, but that number last year had fallen to 72,000. Total loans originated under the HECM program stand at 740,000, while about 582,000 are still outstanding.
The study indicates the CFPB policy related to reverse mortgages will likely focus on disclosure.
"It can be hard to tell a reverse mortgage is better than downsizing, refinancing or using a traditional home equity loan," Cordray said. "Even when a homeowner makes a careful decision to take out a reverse mortgage, it can be a challenge to select the right product and determine the appropriate amount to borrow initially."
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. To that end, the agency said, the CFPB will consider measures the Federal Reserve Board had proposed in 2010—before Dodd-Frank transferred consumer policy to the bureau. That proposal would have imposed limits on misleading advertising by reverse mortgage providers, and strengthened restrictions related to cross-selling of reverse mortgage products.
"Bottom line: consumers need to better understand reverse mortgage loans. The release of this study could not be more timely," said Hubert "Skip" Humphrey 3rd, who heads the CFPB's Office for Older Americans.
The bureau, which has authority to write consumer protection rules for banks and nonbanks, and supervise larger institutions for compliance, does not appear to be planning rules curbing any existing products. However, Cordray said the new agency will use its enforcement authority on "unfair, deceptive or abusive practices" to penalize unscrupulous reverse mortgage providers.
Referring to the “Ask the CFPB” section on the agency's website, which provides answers to financial consumers' frequently asked questions, Cordray said that feature "cannot succeed in making the costs and risks of reverse mortgages clear if lies and deceptions are infecting the market."
He cited 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. Practices like these cannot be allowed to continue," he said. "We will work with our partners at the federal, state and local level to root out these kinds of schemes."