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Bureau Seeks Additional Consumer Input on Reverse Mortgages
WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (CFPB) released a report highlighting the risks for American consumers as they struggle to understand reverse mortgages. The Bureau also announced a Request for Information to gather public input on follow-up questions regarding reverse mortgages.
“Reverse mortgages are complex and have the potential to become a much more pervasive product in the coming years as the baby boomer generation enters retirement,” said CFPB Director Richard Cordray. “With one in ten reverse mortgages already in default, it is important that consumers understand what they are signing up for and that it is the right product for them.”
A reverse mortgage is a special type of home loan that allows older homeowners to access the equity they have built up in their homes now, and defer payment of the loan until they pass away, sell, or move out of the home. Reverse mortgages require no monthly mortgage payments, but borrowers are still responsible for property taxes and homeowner’s insurance. Nearly 10 percent of reverse mortgage borrowers are at risk of foreclosure because they have failed to pay taxes and insurance.
The original purpose of reverse mortgages was to enable older homeowners to convert home equity into an income stream or line of credit that borrowers could use in retirement. It was anticipated that most, though not all, borrowers would use their loans to age in place, living in their current homes for the rest of their lives or at least until they needed skilled care.
Today’s reverse mortgage study, a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act, found that what is happening in practice is different than what was intended. Some of the Bureau’s main findings and concerns are:
- Lack of Understanding: The CFPB report found that while consumers are largely aware of reverse mortgages, few completely understand them. Many consumers struggle to understand how their loan balance will rise and their home equity will fall over time with a reverse mortgage. Some borrowers do not understand that they need to continue to pay taxes and insurance with a reverse mortgage. The Bureau’s inquiry seeks feedback on what factors are most important in deciding whether or not to take out a reverse mortgage and how consumers choose between lenders.
- Younger Borrowers: The CFPB report found that consumers are getting reverse mortgages at younger ages. The most common age for a new borrower is 62—the first year in which a consumer becomes eligible for a reverse mortgage. These borrowers will have fewer resources to pay for everyday and major expenses later in life and may find themselves without the financial resources to finance a future move—whether due to health or other reasons. The Bureau is looking for feedback as to why borrowers typically pay off their loans before they pass away and how those borrowers finance a later move with less equity.
- Lump Sum Payments: According to the CFPB study, seventy percent of borrowers are taking out the full amount of proceeds as a lump sum rather than as an income stream or line of credit. This raises concerns that consumers who take out all of their accessible home equity upfront will have fewer resources available later in life. They may not have the money to continue to pay taxes and insurance on their homes, which can put them at risk of losing their home. Borrowers who save or invest the proceeds may be earning less on the savings than they are paying in interest on the loan. The CFPB’s inquiry asks for feedback on what borrowers do with their large lump sum payments.
- Deceptive Marketing: The Bureau understands that older consumers may be receiving deceptive and misleading marketing materials about reverse mortgages. The Bureau has seen examples of mailers that tout reverse mortgages as a government benefit or entitlement program like Medicare. These mailers use images that look like government seals in order to entice consumers to sign up. It is difficult to tell from these materials that a reverse mortgage is in fact a financial product and not a government benefit. The CFPB is requesting information on what factors are most important to consumers in choosing among products and lenders for a reverse mortgage.
- Housing Counseling: The CFPB report concluded that the new array of product choices in the reverse mortgage market makes a housing counselor’s job much more difficult. Counselors need improved methods for helping consumers better understand the complex tradeoffs they need to make in deciding whether to get a reverse mortgage. The Bureau is seeking feedback on consumer experiences during the reverse mortgage shopping process.
The Bureau has posted new questions and answers about reverse mortgages to the Ask CFPB database. The Bureau has also developed a fact sheet and a consumer guide for older Americans with key facts on reverse mortgages.
The Bureau will use the information from today’s report and from the inquiry to inform future policy and disclosure decisions on reverse mortgages. In the meantime, the Bureau will monitor the markets for unfair, deceptive, or abusive practices and use its supervisory and enforcement authorities as appropriate.
The CFPB is currently accepting reverse mortgage complaints through the web at www.consumerfinance.gov, phone at 1-855-411-CFPB, and mail.
The Request for Information was submitted to the Office of the Federal Register on June 26, 2012. Comments will be due 60 days after publication.