Reverse mortgages are the subject of a Report to Congress and a Notice and Request for Information recently issued by the Consumer Financial Protection Bureau.
Report to Congress
The report is the product of the CFPB’s study of reverse mortgages mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. It includes sections devoted to (1) requirements of the Federal Housing Administration’s Home Equity Conversion Mortgage program, key product options, costs and fees, and alternatives to reverse mortgages, (2) borrower awareness, attitudes, motivations, demographics, usage, and new risks, (3) the reverse mortgage market, (4) the current federal and state regulatory structure, and (5) consumer protection concerns.
The five key findings identified by the CFPB are:
Reverse mortgages are difficult for consumers to understand because of their rising balance/falling equity feature, the variety of reverse mortgage products and options available, and the inadequacy of federally mandated disclosures and other tools intended to assist consumers in making decisions.
Risks to consumers are increasing because reverse mortgages are being used differently than in the past, such as by borrowers who are younger, withdrawing more equity upfront, predominantly taking lump-sum loans, and using reverse mortgages only to refinance traditional mortgages rather using them than to pay for everyday or major expenses.
Risks to consumers are being created by (1) the large proportion of reverse mortgage borrowers at risk for foreclosure due to borrowers not understanding that they still need to pay taxes and insurance, (2) misleading advertising, (3) spouses and other family members who are not co-borrowers not understanding the risk of home loss, and (4) the large presence in the reverse mortgage market of small originators who are not depository institutions.
Available counseling needs to be improved and “may be insufficient to counter the effects of misleading advertising, aggressive sales tactics, or questionable business practices. Stronger regulation, supervision of reverse mortgage companies, and enforcement of existing laws may also be necessary.” (emphasis added)
Strong supervision and enforcement is needed to ensure compliance with cross-selling prohibitions, vigorous enforcement is needed to protect older homeowners from fraud and other scams, special reverse mortgage disclosures are needed, but existing special disclosures are difficult for consumers to understand, and there are no specific federal rules governing deceptive advertising of reverse mortgages.
Based on these findings, the CFPB has identified areas in which it believes it can play a role “to protect consumers from risks posed by reverse mortgages and to help consumers make better decisions about reverse mortgages.” That role includes (1) issuing regulations addressed specifically to reverse mortgages (with the CFPB considering the Federal Reserve Board’s 2010 proposal that contained new advertising restrictions), (2) monitoring the market for unfair, deceptive, or abusive practices and compliance with existing laws (with the CFPB taking enforcement and supervisory action when necessary), and (3) taking and resolving complaints from consumers (which the CFPB is currently doing through its on-line complaint system).
As part of its efforts to improve consumer decision-making, the CFPB has also posted on its website a new four-page Consumer Guide on reverse mortgages and updated the answers to common reverse mortgage questions posted on its website.
Notice and Request for Information
The CFPB’s NOTICE AND request for information contains questions divided into four broad topics identified in the study as warranting further research “to help determine if additional consumer education or regulatory action is needed.” Those topics are (1) factors influencing consumer decisions, (2) consumer use of reverse mortgage proceeds, (3) longer-term outcomes of reverse mortgages, and (4) differences in market dynamics and business practices among broker, correspondent and retail channels. Comments are due 60 days after publication of the request in the Federal Register.
The Dodd-Frank Act gave the CFPB supervisory authority over non-depository residential mortgage lenders, and Ballard Spahr lawyers are currently assisting clients to prepare for their first CFPB exams.
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). The group includes the firm’s Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions.
The CFS Group also produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe to the blog, use the link provided to the right.
For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or firstname.lastname@example.org; CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or email@example.com; John L. Culhane, Jr., at 215.864.8535 or firstname.lastname@example.org; or Christopher J. Willis at 678.420.9436 or email@example.com; Mercedes Kelley Tunstall at 202.661.2221 or firstname.lastname@example.org;Mortgage Banking Practice Leader Michael S. Waldron at 202.661.2234 or email@example.com; or Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or firstname.lastname@example.org.