CFPB Issues Advisory Warning Consumers Not To Be Deceived
Today the Consumer Financial Protection Bureau (CFPB) released results of a focus group study on reverse mortgage advertisements that found many participants were left with misimpressions about the product.
After viewing the ads, consumers were confused about reverse mortgages being loans, and they were left with false impressions that they are a government benefit or that they would ensure consumers could stay in their homes for the rest of their lives.
Today, the CFPB is also issuing an advisory that warns consumers that many reverse mortgage ads do not tell the full story.
“As older consumers consider reverse mortgage loans to tap into their home equity, they need to be careful of those late night TV ads that seem too good to be true,” said CFPB Director Richard Cordray. “It is important that advertisements do not downplay the terms and risks of reverse mortgages or confuse prospective borrowers.”
The study can be found at: http://files.consumerfinance.gov/f/201506_cfpb_a-closer-look-at-reverse-mortgage-advertising.pdf
A reverse mortgage is a special type of home loan that allows older homeowners to access the equity they have built up in their homes and defer payment of the loan until they pass away, sell, or move out.
The loan proceeds are generally provided to the borrowers as lump-sum payments, monthly payments, or as lines of credit. The reverse mortgage market is about 1 percent of the size of the traditional mortgage market, with 628,000 outstanding loans, according to industry reports. Most reverse mortgages today are federally insured through the Federal Housing Authority’s Home Equity Conversion Mortgage program, which carry some regulatory requirements.
The number of reverse mortgage originations is likely to increase in upcoming years with the retirement of the “baby boom” generation, which has more home equity than retirement savings. Studies have estimated that among Americans nearing retirement, 41 percent have no retirement savings account. But a majority of them, about 74 percent, own their homes and have built up good equity. The most common ways for consumers to access this home equity is to refinance their original mortgage, take out a home equity loan or line of credit, sell the home and downsize, or obtain a reverse mortgage.
Today’s CFPB study is based on 97 unique ads found on TV, radio, in print, and on the Internet.
The CFPB interviewed about 60 homeowners age 62 and older in focus groups and in one-on-one interviews in Chicago, Los Angeles, and Washington, D.C. The study found that many of the ads were incomplete and/or contained inaccurate information. While advertisements frequently do not describe all the details of the particular product or service being sold, the incompleteness of reverse mortgage ads raises heightened concerns because reverse mortgages are complicated and often expensive loans intended for older, and frequently vulnerable, homeowners. The study found that the ads were characterized by:
• Ambiguity that reverse mortgages are loans: Some consumers found it difficult to understand from the ads that reverse mortgages are loans with fees and compounding interest; that the loans need to be repaid. Most ads either did not include interest rates or included interest rates in fine print. Other consumers 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.
• False impressions about government affiliation: The advertisements left some older homeowners with the false impression that reverse mortgages are a risk-free government benefit, and not a loan. The study found that consumers often misinterpret the role of the federal government in the reverse mortgage market as providing consumer protections that are not actually offered.
• Difficult-to-read fine print: The study found that some consumers did not pick up on key aspects of the loan because the loan requirements were often buried in the fine print if they were even mentioned at all. Many reverse mortgage ads reviewed did not, for example, mention helpful information like interest rates, repayment terms, and other requirements.
• Celebrity endorsements that imply reliability and trust: Many ads featured celebrity spokespeople discussing the benefits of reverse mortgages without mentioning the risks. Most consumers recalled TV ads that featured spokespeople portrayed as reliable and trustworthy. One consumer in one focus group said, “When it’s a former Congressman endorsing it, it makes it sound like a good idea.”
• False impressions about financial security and staying in the home for the rest of the consumer’s life: The study found that many ads implied financial security for the rest of a consumer’s life. But a reverse mortgage does not guarantee financial security no matter how long a consumer lives. A consumer can tap into their equity too early and run out of funds to draw on. In addition, borrowers with a reverse mortgage are still responsible for paying property taxes, homeowner’s insurance, and property maintenance. Failing to meet these requirements can trigger a loan default that results in foreclosure.
Most of the advertisements reviewed failed to mention such requirements.
Incomplete or inaccurate statements made in advertisements about reverse mortgages can pose serious risks to older Americans. Without more balanced information, consumers may not make the right financial choice and jeopardize their retirement security. This means they could run out of money for their day-to-day expenses or even lose their homes.
Consumer Advisory: Don’t Be Misled By Reverse Mortgage Advertising
Today the CFPB is issuing an advisory warning older Americans to watch out for misleading or confusing reverse mortgage advertisements. The advisory highlights facts that consumers should keep in mind when seeing the ads:
• A reverse mortgage is a home loan, not a government benefit: Consumers need to know that reverse mortgages have fees and compounding interest that must be repaid, just like other home loans.
• Reverse mortgage ads don’t always tell the whole story: Reverse mortgage ads don’t always tell the whole story, such as that a consumer can lose ownership of their home.
• Without a good plan, a consumer could outlive the loan money: Consumers should have a financial plan in place that accounts for a long life. That way, if a consumer needs to tap into their home equity, they won’t do it too early and risk running out of retirement resources later in life.
The CFPB’s advisory can be found at: http://files.consumerfinance.gov/f/201506_cfpb_consumer-advisory-dont-be-misled-by-reverse-mortgage-advertising.pdf
The Bureau has questions and answers about reverse mortgages at Ask CFPB. The Bureau also has developed a consumer guide for older Americans with key facts on reverse mortgages. Consumers can submit a complaint with the CFPB about reverse mortgages online at www.consumerfinance.gov, by phone at 1-855-411-CFPB or TTY/TDD (855) 729- 2372, or by mail.
More information for older Americans and their caregivers about making financial decisions, protecting assets, preventing financial exploitation, and planning for long-term financial security can be found at: consumerfinance.gov/older-americans/
The Consumer Financial Protection Bureau 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 consumerfinance.gov.
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