Prepared Remarks of CFPB Director Richard Cordray on the Reverse Mortgage Advertising Press Call
Thank you all for joining us today for the release of our study on reverse mortgage advertisements.
Right now, we are experiencing the greying of America, with 45 million people in this country who are age 65 or older and 10,000 more who are turning 65 each day. They are our grandparents, our parents, our neighbors, our friends. And they are living longer, healthier lives than ever before. The average American is now spending about 20 years in retirement.
For many older Americans, much of their net worth is tied up in their home. Whether they came of age during the Depression or are a product of the baby boom, these folks have typically worked hard, paid down their mortgages, and perhaps seen their homes increase in value. But in general that home equity cannot be accessed to improve their day-to-day lives without selling the very home they have spent so much time in. For some, they turn to a home-equity loan. For others, an option that can seem enticing is a reverse mortgage.
A reverse mortgage is a special type of loan for older homeowners. Seniors can borrow against the equity in their homes, but they do not have to make monthly mortgage payments like they would with a home equity loan. Instead of paying down the loan over time, the loan balance actually gets larger, with repayment deferred until the borrower dies, sells, moves out of the house, or defaults on other obligations such as insurance or taxes. Today the reverse mortgage market is about 1 percent of the size of the traditional mortgage market, according industry reports, with about 628,000 outstanding loans.
At the Consumer Financial Protection Bureau, we have done much work on reverse mortgages, starting with a comprehensive report on the industry that we published three years ago. Today we are releasing a study on the TV, print, radio, online, and mailing advertisements that are selling this product. What we found is that many ads leave consumers with misimpressions about how a reverse mortgage loan works.
Our study looked at 97 different advertisements. We asked dozens of older homeowners in three different cities what they thought when they saw some of these various ads. The study found that the consumers were generally confused by them.
The study found, for example, that consumers found it difficult to understand from the ads that reverse mortgages are loans with fees and compounding interest. Most ads did not include interest-rate information or included it only in the fine print. Other consumers mistakenly thought that because the money they received through a reverse mortgage represented home equity they had accrued over time, there was no reason they would have to pay it back.
Consumers were also left with false impressions about reverse mortgages being a risk-free government benefit, not a loan. We found that consumers often misinterpreted the role of the federal government in reverse mortgages as providing consumer protections that are not actually offered. Indeed, even before we conducted our focus group study, we had heard stories about consumers being deceived and misled in this regard. Earlier this year, the Consumer Bureau had to take action against a mortgage company for misleading consumers with advertisements implying that the U.S. government approved of its product. The company had placed an eagle resembling the Great Seal of the United States on its mailer with a header that read, “GOVERNMENT LENDING DIVISION.” This gave the impression that the loan originated from the U.S. government, or an entity affiliated with the government, when clearly it did not.
Our focus group with consumers also looked at the many reverse mortgage ads that feature celebrity spokespeople. These well-known actors, even a former senator, add a false air of credibility to the products. One consumer in one focus group said, “When it’s a former Congressman endorsing it, it makes it sound like a good idea.”
In the end, perhaps most concerning of all, the ads left the consumers believing that if they purchase a reverse mortgage loan, they will be able to rest assured that they can live in their homes and enjoy financial security for the rest of their lives. But a reverse mortgage does not carry such guarantees. A consumer can tap into the equity too early and run out of funds. In addition, with a reverse mortgage, the consumer still has to pay property taxes, homeowner’s insurance, and property maintenance fees. All of these costs can be significant. And if a consumer does not meet these obligations, he or she can still end up in foreclosure.
Most of the advertisements reviewed failed to mention such risks. Or, if they did, they were so buried in the fine print that consumers did not pick up on these key aspects of the loan. Indeed, many reverse mortgage ads did not even mention anything about interest rates, repayment terms, or other crucial requirements of the loan. While advertisements for many different kinds of products often do not describe all the details of the particular product, their incompleteness could lead to a determination that they are unfair or deceptive if coupled with claims of guarantees or strong statements about the absence of risk.
The incompleteness of reverse mortgage ads on these key points raises heightened concerns because reverse mortgages are inherently complicated and because they are marketed to older homeowners who are known to be more vulnerable in many instances. Such incomplete or inaccurate information in an ad can cause older Americans to make the wrong choice that jeopardizes their financial security. They could run out of money for their day-to-day expenses or they could even lose their homes.
As a first step in response to the results of today’s study, we are issuing a consumer advisory. We want older Americans to be aware of certain factors when they see these ads. First, they need to know that a reverse mortgage is a home loan, not a government benefit. Second, they need to know that these ads may fail to tell the whole story. Third, they need to have a good plan in place in case they outlive the loan money.
Today’s study strengthens our resolve to make sure that consumers are protected when it comes to reverse mortgages. We have already produced a guide to help people assess the pros and cons of this product. For those who already have a reverse mortgage, we have offered tips on how to plan ahead to avoid future financial hardships that may result from certain mortgage terms.
The law that created our new agency specifically recognized the need to protect older Americans against financial exploitation and to promote economic security later in life. With the aging of the baby boomer generation, that mission has never been more important. To fulfill that mission, we will continue to exercise appropriate oversight and we will pursue enforcement actions as justified by the facts as we understand them. Thank you.
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.