Consumer Group Promotes Reverse Mortgage Reforms
Action urged as lenders mount PR campaign and CFPB holds hearing
Wednesday, June 27, 2012
Consumers Union is calling on the Consumer Finance Protection Bureau (CFPB) to protect vulnerable seniors from reverse mortgage abuses.
The policy and advocacy division of Consumer Reports is renewing its call for stricter oversight of reverse mortgages just as the industry launches a public relations campaign to repair its image and the CFPB prepares to hold a field hearing on the topic on tomorrow (June 27) in Tampa.
"Reverse mortgages should only be used as a last resort because they can carry huge costs that can quickly drain a homeowners equity," said Norma Garcia, senior attorney and manager of Consumers Union's financial services program. "The reverse mortgage industry insists that it can police itself but it's clear we need common sense oversight by the CFPB to protect seniors."
Reverse mortgages enable borrowers who are 62 or older to obtain income through cash payment or lines of credit by tapping the equity in their home. The reverse mortgage loan becomes due when the borrower dies, leaves the home for 12 consecutive months or more or fails to maintain the property or pay homeowners insurance or property taxes. Borrowers must pay a loan origination fee, closing costs, and compounding interests on the loan principal, which can be significant.
Consumers Union's December 2010 report on reverse mortgages documented a number of concerns that underscore the need for stronger oversight by the CFPB. The report was co-written by California Advocates for Nursing Home reform and the Council On Aging Silicon Valley.
The report highlighted how borrowers can be duped by misleading marketing claims and that required counseling provided by the Department of Housing and Urban Development (HUD) was inadequate. It also noted that seniors are sometimes targeted with aggressive cross promotion of other financial products like long term care insurance or annuities that may not be suitable for them.
Finally, the report cited recent HUD statistics finding that an increasing number of borrowers had defaulted because they were unable to pay their property taxes or homeowner insurance premiums as required.
Consumers Union called on the CFPB to take a number of steps to protect seniors, including:
Ensure loans are suitable for borrowers: Lenders and brokers should be required to consider whether the loans put borrowers at risk of losing their homes, if the borrower understands the complex nature of the contract, and if there are more viable alternatives available to the borrower.
Establish a fiduciary responsibility for the loan: Lenders and brokers must be required to act in the best interests of the borrower and should be held liable for violating this fiduciary duty.
Outlaw deceptive marketing: All reverse mortgages should be required to include information to help borrowers determine whether the loans are suitable for them.
Adopt stronger prohibitions on cross promotions: Prohibitions against cross promotions of other financial products by lenders and brokers should extend to non-HECM loans. Insurance agents and brokers should be held liable for selling an annuity when it is purchased with reverse mortgage funds.
Strengthen the quality and content of counseling: HUD counselors should be required to hold an in-person session with prospective borrowers to determine whether a reverse mortgage is suitable for the borrower. The counselor should deny a counseling certificate to the borrower if the loan is not in the best interest of the senior.
Protect non-borrowing spouses and tenants: Spouses and tenants whose names are not on the reverse mortgage loan should be notified about their limited rights to remain in the home after the borrower dies or permanently moves out of the home.
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