Reverse mortgages have become a common, albeit controversial, way for older homeowners to access cash by using their home’s equity to secure a loan. Reverse mortgages were expected to increase as the US population ages. But these home loans are risky products that the intended consumers, the elderly, who sometimes live on low incomes, might not fully understand. Regulators therefore require lenders to make certain disclosures to people who take out reverse mortgages.
However, providing information will not automatically eliminate the possibility of predatory or deceptive lending. Some advocacy groups — Consumer Advocates Against Reverse Mortgage Abuse (CAARMA), for example — suggest that the structure of federally backed reverse mortgages needs to be transformed because the loans often lead to poor outcomes. In particular, they argue that “thousands and thousands of heirs are prevented from satisfying the reverse mortgage”, resulting in lost inheritances, and that half of non-borrowing surviving spouses will not be able to stay in their homes after the death of the borrowing spouse. .
Key points to remember
- Under federal and state laws, reverse mortgage lenders must disclose certain information to potential borrowers.
- Often borrowers are also required to go through reverse mortgage advice and may additionally be required to undergo a ‘cooling off’ period after the advice before charges can be assessed.
- Some consumer advocates suggest the federally-backed mortgage structure needs to be transformed to protect vulnerable senior homeowners.
Disclosures under Federal Law
There are some things reverse mortgage lenders can’t do, but there are also things they must do.
Federal laws say they cannot perform “unfair or deceptive” practices. Section 5 of the Federal Trade Commission Act, for example, applies to reverse mortgages. Lying or misleading potential borrowers about the terms of a reverse mortgage, for example, is not legal. Lenders are also not allowed to use the Federal Housing Administration logo or falsely imply that their services are from the government.
Additionally, according to Regulation Z of the Truth in Lending Act (TILA), lenders must make specific disclosures to people applying for a reverse mortgage. These include:
- A notice that just because you’re applying for a reverse mortgage doesn’t mean you have to accept it, even if an application has been signed.
- A Good Faith Estimate (GFE), a form the lender provides to explain the basics of the loan. It is intended to allow you to get an idea of the real cost of the loan or to compare loans.
- A detailed list of the loan, including loan fees, terms, appraised values used for the home, and the age of the youngest borrower.
- An explanation of the Total Annual Loan Cost (TALC) rate table, which gives the annual percentage cost of a reverse mortgage, based on predefined loan periods and an assumed annual appreciation of the home, according to the explanations of the TALC calculations.
Regulation Z protects consumers from deceptive credit industry practices and provides them with reliable information on the costs of credit.
Disclosures Under State Laws
There are also state laws protecting consumers from reverse mortgages.
Amy Loftsgordon, an attorney at Nolo, notes that over the years, states have begun to pass laws to protect seniors from misleading advertising. For example:
- Maryland– demanded that lenders send a checklist to potential borrowers that advises them to speak with a reverse mortgage advice agency.
- Washington— requires that a note, in accordance with certain guidelines, be sent to potential borrowers, indicating that they must receive advice before obtaining a reverse mortgage.
- California— has a mandatory reflection period of seven days. Once a potential borrower has completed the mandatory counseling session, they must wait at least seven days before the lender can assess the charges.
Are disclosures actually being made?
Defaults on reverse mortgages may trend higher. According to a 2019 Government Accountability Office (GAO) report, a growing number of home equity conversion mortgages (HECMs), the most common type of reverse mortgage, have gone from 2% of loan terminations in 2014 to 18% in 2018. This was primarily due to borrowers not meeting tenure requirements or paying taxes or insurance, according to the GAO report. He also listed several weaknesses in the FHA program that oversees HECMs, pointing to the need for better oversight to ensure loan servicers are following requirements, including those designed to help protect borrowers.
Litigation could also increase. State attorneys, including West Virginia, have reported that the number of consumer lawsuits over reverse mortgages has increased in recent years.
It is somewhat difficult to know from outside the industry what percentage of lending is unscrupulous, although stories of unscrupulous lenders have proliferated. A 2019 survey published in USA today, for example, alleged that nearly 100,000 loans had been foreclosed in a “stealth aftershock of the Great Recession,” driving down the property values of entire neighborhoods—primarily low-income, urban, and black—across the United States. This investigation has been controversial within the reverse mortgage industry.
Does a reverse mortgage affect your heirs?
It is certainly possible. When a borrower dies, this can trigger the repayment of the reverse mortgage. Your heirs will have to repay either the loan balance or 95% of the appraised value of the home, whichever is lower. Your heirs have 30 days after receiving notice from the lender to do so, or else give up the house.
What is prohibited in reverse mortgage advertising?
Lenders cannot claim that their products are co-signed or otherwise approved by the federal government, or use official government logos.
How are reverse mortgages repaid?
Often, a reverse mortgage will be paid off using the money from the sale of the house.
Reverse mortgage lenders must disclose certain information to borrowers as required by federal and state laws. Disclosures are meant to give the borrower some insight into reverse mortgages and the process around them, and at the state level they often involve a notice that the borrower will need to go through some form of counseling. (Counseling is also required to receive a federally backed HECM loan.) Notably, however, consumer rights advocates and lawyers warn that reverse mortgages can be plagued with hidden fees and deceptive practices, making them risky for seniors looking to use them to tap into in the equity in their home.