[Update 1: Article updated with a quote from the National Reverse Mortgage Lenders Association.]
A new study from the Consumer Financial Protection Bureau found that reverse mortgage advertising can be confusing and misleading, and issued a warning to older Americans to be on the lookout for potentially deceptive reverse mortgage advertisements.
In the new study released Thursday, CFPB said that consumers were confused about reverse mortgages being loans, and they were left with “false impressions” that reverse mortgages are a government benefit or that getting a reverse mortgage would ensure consumers could stay in their homes for the rest of their lives.
“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.
According to the CFPB, the number of reverse mortgage originations is likely to increase in the coming years with the retirement of the “baby boom” generation, which the CFPB says has more home equity than retirement savings.
Studies have estimated that among Americans nearing retirement, 41% have no retirement savings account. But a majority of them, about 74%, own their homes and have built up good equity, the CFPB said.
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, the CFPB added.
The reverse mortgage market is about 1% of the size of the traditional mortgage market, with 628,000 outstanding loans, according to the CFPB.
And as the amount of reverse mortgages is expected to increase, the CFPB is attempting to prepare older Americans for the reality of what a reverse mortgage actually is.
To that end, the CFPB conducted a study in which the Bureau 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 focus groups were shown 97 unique for reverse mortgages that were found on TV, radio, in print and on the Internet.
According to the CFPB, 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 CFPB said in a release.
The CFPB study also found that the ads were ambiguous about the fact 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,” the CFPB said. “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.”
The CFPB also said that the ads reviewed “give false impressions” about reverse mortgages’ standing with the government.
“The advertisements left some older homeowners with the false impression that reverse mortgages are a risk-free government benefit, and not a loan,” the CFPB said. “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.”
The CFPB study also found that the ads contain “difficult-to-read fine print,” which prevented consumers from fully understanding the terms and conditions of a reverse mortgage loan.
“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,” the CFPB said. “Many reverse mortgage ads reviewed did not, for example, mention helpful information like interest rates, repayment terms, and other requirements.”
The CFPB study also found that some reverse mortgage companies use celebrity endorsements, which imply reliability and trust in the companies themselves.
“Many ads featured celebrity spokespeople discussing the benefits of reverse mortgages without mentioning the risks,” the CFPB said. “Most consumers recalled TV ads that featured spokespeople portrayed as reliable and trustworthy.”
According to the CFPB, one consumer in one focus group said, “When it’s a former Congressman endorsing it, it makes it sound like a good idea.”
The CFPB also found that the ads created false impressions about financial security and mislead consumers about whether they’d be able to stay in their home for the rest of the their lives.
“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,” the CFPB said.
“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,” the CFPB continued. “Failing to meet these requirements can trigger a loan default that results in foreclosure. Most of the advertisements reviewed failed to mention such requirements.”
As a result of the study, the CFPB issued a warning to older Americans to caution them on reverse mortgage advertising.
The CFPB is warning older Americans that:
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 noted that it is not taking action against any specific reverse mortgage lender for misleading advertising at this time, but noted that it did take action against a reverse mortgage advertiser earlier this year for misleading consumers.
In February, the CFPB said that All Financial Services used advertisements that were deceptive. The Bureau alleged that the company misrepresented that the source of the advertisements was, or was affiliated with, a governmental entity.
“Incomplete or inaccurate statements made in advertisements about reverse mortgages can pose serious risks to older Americans,” the CFPB said. “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.”
Peter Bell, the president of National Reverse Mortgage Lenders Association, said that the NRMLA’s guidelines have very specific instructions about the use of advertising.
“We share viewers’ concerns that any advertising should be accurate,” Bell said. “That’s why NRMLA has a code of ethics and professional responsibility along with explicit guidance for ethical advertising. As an association we are committed to educating consumers about the pros and cons of reverse mortgages, training lenders to be sensitive to clients' needs, and enforcing our Code of Ethics and Professional Responsibility.”