0 Oversight of reverse mortgages needed to protect seniors

Reforms are needed to protect seniors from the potential pitfalls of reverse mortgages, says Consumers Union, the advocacy arm of Consumer Reports, and the California Advocates for Nursing Home Reform, which today urged the Consumer Financial Protection Bureau to adopt such measures.

The CFPB is collecting public comment on reverse mortgages as it considers whether to strengthen oversight of the industry.

Reverse mortgages let homeowners 62 or older draw on their home equity while continuing to live at home. The loan is due when the borrower dies, or moves out of or sells their home. Borrowers pay a loan origination fee, closing costs, and compounding interest on the loan principal, which can be significant and can rapidly deplete a home's equity. Most reverse mortgages are insured by the U.S. Department of Housing and Urban Development; that coverage guarantees that lenders will be repaid in full when the home is sold. Borrowers who fail to maintain the property or pay homeowners insurance or property taxes risk default and foreclosure.

"Seniors can be an easy target for unscrupulous reverse mortgage lenders who prey on borrowers who may not fully understand the complex nature of these loans," says Norma Garcia, senior attorney and manager of Consumer Union's financial services program.

Reverse mortgage defaults have risen. About 54,000 HUD-insured reverse mortgage borrowers are in default, the vast majority of which are triggered when borrowers can't pay their property taxes or keep up with their homeowners insurance.

"We are concerned about seniors who have taken out reverse mortgages without fully understanding what they were getting themselves into," said Prescott Cole, senior attorney for California Advocates for Nursing Home Reform.

Consumers Union and the California Advocates for Nursing Home Reform recommended the following reforms:

• 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.

• 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.

• The CFPB should investigate marketing practices by "lead generators," who may be misleading seniors into providing information to sell to loan originators and brokers.

• Prohibitions against cross promotions of other financial products by lenders and brokers should extend to non-HUD-insured loans.

• 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.

• 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.

Reverse mortgages can be an appropriate option for some older homeowners. For more about living off your home equity read Reverse mortgages and their alternatives.

Source:
CFPB Urged to Protect Borrowers From Reverse Mortgage Abuses [Consumers Union]