The CFPB released a detailed report to Congress in June on the state of the reverse mortgage industry with conclusions that made national headlines. Media outlets ran sensational stories about the
But in reality, the 231-page report said so much more about the HECM product other than the simple claim that its complexities can be confusing. Much of it was insightful, and some of it was even positive. As NRMLA President Peter Bell said, “The bark was less than the bite—the headlines generated from the report are far more upsetting than the actual report.”
Indeed, the report cites evidence to suggest that the market is “poised to grow in reach and impact” as the baby boomer generation continues to age. While noting that the current market is rather small, with only about 2 to 3 percent of eligible homeowners utilizing the product, the study acknowledges that this is bound to change: “Reverse mortgages have the potential to become a much more prominent part of the financial landscape in the coming decades.”
This is good news for the industry, and a strong incentive for the CFPB to get to work on addressing issues that may hinder the program’s effectiveness. Released one month ahead of schedule, the study was commissioned as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It set out to create a comprehensive guide on the reverse market and assess consumer protection concerns, and did so by offering an extremely detailed history of the program and its evolution, as well as a thorough analysis of the various products currently on the market.
What it did not do, however, and what drew the ire of many in the reverse space, was talk to actual consumers. Rather than reaching out to those who have actually used the product, the bureau relied on anecdotal evidence to make assertions about the program. It spoke to 15 different companies in various sectors of the industry and examined consumer submissions to the CFPB and complaints made to the FTC. Not once did it seek feedback from the seniors who are purportedly confused by the product.
Acknowledging that consumer feedback was lacking, the bureau issued a Request for Information to gather input from the public about the product. The request specifically asked for information on the factors most important to consumers when considering a reverse mortgage, the longer-term outcomes for borrowers and how borrowers use loan proceeds. Submissions were due August 31, and the results are expected to impact the bureau’s proposed legislation. Until then, industry will have to sit tight and hope that actual consumer feedback challenges some of the assumptions made in the report.
GENERATION ASKS BORROWERS TO WEIGH IN
In response to the bureau’s report, Generation Mortgage reached out to its borrowers to determine exactly how accurate the agency’s assertions are.
The company polled 3,796 borrowers, asking questions about their product knowledge and experiences both before and after obtaining a reverse mortgage. As of press time, about 10 percent of those surveyed had responded. The company intends to release the survey’s full results later this fall, but early reponses indicate that, contrary to the bureau’s findings, most of GMC’s borrowers do understand the complexities of the product.
THE INDUSTRY REACTS
More Study Needed
By Jim Milano
Weiner Brodsky Sidman Kider
“We have met the enemy, and he is us.”
Comments about the HECM’s complexity remind me of a story I heard about Elizabeth Warren in her early days as “special advisor” to the CFPB. During an initial outreach meeting with representatives from the mortgage industry, an industry representative reportedly presented her with a stack of loan disclosures and asked, “Why is this stack of papers so large and why do lenders require all of this?” Perhaps, after more clearly understanding the history of disclosure requirements, Ms. Warren had an epiphany and made it an early goal of the bureau to simplify mortgage disclosures. And this “simplification” is in fact mandated by the Dodd-Frank Act, not only for forward mortgages, but also for reverse. Perhaps Ms. Warren’s thoughts echoed the famous words of the ’70s comic strip character Pogo: “We have met the enemy, and he is us.”
If reverse mortgages are difficult to understand, one would think that the general TILA disclosures, including either Important Terms disclosures or closed-end Truth-in-Lending disclosures (that, quite frankly, do not work well with reverses mortgages), along with the TALC, the GFE and HUD-1, are at least partly to blame. Revised, uniform and simplified disclosures for reverse mortgages cannot come soon enough. However, in the bureau’s proposed TILA-RESPA Integrated Disclosure Rule, published by the bureau on July 9, 2012, it is clear that revised and simplified reverse mortgage disclosures are not on the immediate horizon. Quite the contrary. In the proposed TILA-RESPA Integrated Disclosure Rule, the bureau said that until it can finalize a “Know Before You Owe” combined TILA-RESPA disclosure for forward mortgages, reverse mortgage lenders will be required to use the current (and soon to be antiquated) TILA and RESPA disclosures, including the GFE and HUD-1.
If the bureau wants reverse mortgages to be more understandable, part of that solution can come from more simplified and streamlined reverse mortgage disclosures.
Look Ma, No Mortgage Payments
The study notes that reverse mortgage borrowers are getting younger, and having used the equity in their homes, the borrowers will have no home equity from which to draw as they age. This assertion ignores that fact that a borrower may be using a reverse mortgage to pay off, in whole or in part, a forward mortgage. Replacing a forward mortgage with a reverse mortgage removes the monthly mortgage payment obligation. The report also does not go into any detail about recent financial planning literature that suggests that it is sometimes better to tap into home equity earlier in retirement than initially depleting other retirement assets. One can only hope that these oversights or omissions in the report will be corrected in the future in a document billed as “an authoritative resource on reverse mortgage products, consumers, and markets ...”
The same could be said of the bureau’s concerns regarding lump-sum draws. But it’s worth noting that the bureau did issue an official request for more data on the matter of fixed-rate, full-draw reverse mortgages. Hopefully, the bureau will consider that data so that anecdotal statements are not accepted as fact.
Self-Help and Self-Policing
The study states that deceptive or poor advertising has been a problem in the industry. However, in addition to several new regulations, including amendments to the advertising rules under TILA and the FTC MAPs rule, there has been a push in the reverse mortgage industry for a number of years to educate industry members (particularly through NRMLA Ethics Advisories) not only about the ills of poor advertising, but also about monitoring business partners and being cautious in conducting business with those who engage in such practices. The report states that the concerns over cross-selling have subsided, and I also believe that the problems the industry might have had with faulty advertising 8 to ten years ago have substantially subsided and have been significantly reduced. The report does not give the industry enough credit for its self-policing efforts on this front. The claims of faulty reverse mortgage advertising were contained in, among other places, a prior GAO report on reverse mortgages. One would hope that, after a number of years, the “half-life” of the report of alleged past faulty advertising would decrease, and government agencies and consumer advocates would stop using past reports of faulty advertising as assertions of fact on the current state of affairs in the reverse mortgage industry.
Counseling has undergone significant improvements over the past several years, but adequate funding for counseling and quality control remain issues. However, there are resources available for counselors to help explain reverse mortgage programs. Indeed, the updated FHA HECM counseling guidelines recognize and require that counselors use reverse mortgage printouts to show the calculation of the funds available to the senior, payment plan options and comparisons of available products. Using software, counselors are able to show seniors how variations in different reverse mortgage products may affect the client’s equity, loan amortization and projected loan balances, and loan costs. These reverse mortgage loan printouts can include features such as illustrations of future remaining credit line projections based on credit line draws specified by the client; a comparison of estimated loan details at closing; projected loan comparisons at various future times, including projected figures for total cash received and cash remaining; total cost expressed in terms of total dollars and a total annual average rate; and amortization projections for selected products with year-by-year details. Particularly helpful are the models, charts and graphs provided to lenders and seniors by software companies such as ReverseVision.
As the bureau considers new or revised disclosures for reverse mortgages, it should review what is available to counselors and seniors today in the industry, and indicate with specificity what more, if anything, is needed in order to make it easier for counselors to explain various reverse mortgages to seniors.
My Take On It
Overall, the study is very broad and well done. It’s detailed in some areas but lacking depth in others. The media response to the study appears more negative than the study itself. One positive but lesser-mentioned aspect of the study is the assertion that the reverse mortgage industry is currently very small but poised to grow.
One step the industry can take is to respond to some of the findings of the study with additional and more detailed information. Importantly, while the report makes reference to numerous past studies conducted by others (such as the AARP), the study did not involve any direct interviews or surveys of consumers by the bureau. One of the next steps the bureau should take is to review additional information prior to engaging in any proposed rulemaking regarding reverse mortgages.
The Past is Prologue
Regarding reverse mortgage rulemaking, in several areas of the study, the bureau alludes to the 2010 Mortgage Proposal issued by the Federal Reserve Board in September 2010 prior to TILA, Reg. Z and the other federal consumer laws transferring to the bureau. In the 2010 Mortgage Proposal, the Board proposed new reverse mortgage disclosures, more rules for reverse mortgage advertising, additional requirements around counseling, rules on offering other financial services products with reverse mortgages, and a request for comments on whether a suitability standard should be created for reverse mortgages.
When one looks at the bureau’s work in other areas (such as Ability to Repay and Qualified Mortgage rulemaking for forward mortgages) along with the bureau’s expressed concern in the study with the prevalence of the full-draw feature, its effects on government benefits, the younger age of senior borrowers and seniors’ ability to sustain themselves in their homes after receiving a reverse mortgage (including the ability to pay taxes and insurance), it is not difficult to imagine that, once further reverse mortgage market and product information is collected, the bureau will propose rules to address these concerns. The industry’s past and ongoing work in self-policing advertising and other practices—as well as thought leadership and processes placed around model disclosures, additional but limited underwriting and suggestions for further improvements in the quality and funding for counseling—should be taken into serious consideration by the bureau, and should be the foundation and starting point of future discussions among all reverse mortgage stakeholders, including the bureau, industry, HUD, counselors and consumer advocates.
This article is based on the personal views of Jim Milano and does not represent the views or opinions of the law firm of Weiner Brodsky Sidman Kider PC, or its clients.
A Well-intended Hypothesis
By H. West Richards
The CFPB study did a rather impressive job of presenting the history of the reverse mortgage, but it neglected to include the necessary analytics and therefore I think it is rather incomplete. The study itself was extremely well written and organized. It was a well-intended effort that was very effective in identifying areas that need research, but it was published with the implication that all the facts are within, when indeed they are not.
While there was some reference to dated, third-party studies on the industry, there was no current survey or polling of consumers associated with this study. I believe that what the CFPB has purported to be a finding is more of an untested hypothesis that calls for actual statistical support. Given the important charter of the CFPB and its vital role in examining various industries in the financial services arena, I am disappointed that they did not take a more robust scientific approach in this first important effort in evaluating the reverse mortgage industry.
In regard to the agency’s noted concerns about deceptive marketing practices, the industry suspects that only a very 8 small portion of reverse professionals have actually engaged in such activity over the years. It would be interesting to see what the true percentages are from, say, 1990 to 2010. Regardless, it remains the industry’s responsibility to make an effort to weed out bad actors as best as possible and to support prohibitions by the CFPB on deceptive marketing practices.
The CFPB study asserts that new product innovations available to the consumer are confusing. Let’s introduce some perspective into this claim. The FHA introduced the HECM Saver product in October 2010, while the HECM Standard (fixed and variable) has been around for quite some time. Since 2010, there have been no new reverse mortgage products entering the marketplace. There are two versions of each of the two products on the market (HECM Standard fixed, HECM Standard variable, HECM Saver fixed, HECM Saver variable). In today’s general marketplace, where consumers are accustomed to selecting from a plethora of options for any given product, reverse mortgages are hardly a standout with four product choices. That said, it is true that there are some tradeoffs associated in the decision-making lexicon. There are also nuances that exist between HECM products and these are important for the consumer to understand. Anything we can do as an industry to better equip our counselors to effectively educate consumers would certainly be productive.
needs to recognize that this report, while providing a good framework, still requires more work to legitimately be a fully comprehensive study. The bureau needs to obtain information from actual reverse mortgage borrowers and publish actual findings so that all the various institutions within the industry can focus on the areas that need improvement. We need the CFPB to be armed with the best information attainable so they can make informed decisions. The agency must appreciate the responsibility associated with the far-reaching impacts of its policy on the consumer, the industry and the nation. And in turn, we need to recognize our responsibility to assist the CFPB in this discovery effort wherever required.
The CFPB Needs Our Help
By Christopher J. Willis
One notable concern cited in the study is the fact that younger borrowers are taking reverse mortgages earlier than before and in lump sum. It regards this statistic as a criticism of the industry without acknowledging that financial challenges are a fact of life for many senior Americans, and many lack the resources to cover major and even everyday expenses, let alone have funds to set aside for the future. Reverse mortgages do not create this problem, or even exacerbate it. Rather, they provide a mechanism for seniors to use their home equity as a resource, rather than relying on government programs or their children. Absent reverse mortgages, the senior citizens who may have trouble in the future with their expenses will simply have those same problems years earlier, because they would be unable to utilize their home equity as a resource. Reverse mortgages solve an actual, immediate problem for seniors, and the study’s claim that this is risky relates only to a potential, hypothetical future problem.
This finding that consumers do not understand the product is of limited utility since the CFPB did not conduct research by actually interviewing or soliciting feedback from reverse mortgage borrowers. Without empirical evidence, it is impossible to conclude whether or not consumers in general understand their products or not.
Concerns regarding the need for increased counseling funds are well received. The reverse mortgage industry should support any efforts to equip counselors with more or easier-to-use information about reverse mortgages. I believe that the industry would welcome the opportunity to work with the CFPB to develop such materials.
The study suggests that the bureau has serious concerns about the product and the manner in which it is being marketed and provided to consumers. If these concerns are not addressed in a proactive way by the industry, we can expect the CFPB to begin taking action, either through rulemaking or enforcement. The industry must actively engage with the CFPB and help resolve its concerns, or it will lose the opportunity to influence the process and will run the risk of the bureau taking actions that may have very harmful consequences for both the industry and consumers.
Moving forward, I think the industry needs to provide concrete, data-based information to the CFPB to illustrate how reverse mortgages work—successfully—for many consumers, and to illustrate the important financial needs that can only be met through reverse mortgages. The bureau should undertake a second phase of its study that involves examining this feedback to determine whether the findings in this study remain valid after such a review. It should also engage with the industry to discuss disclosures to borrowers and the provision of information provided to counselors.