Reverse mortgages have become a common, if contentious, way for older homeowners to access cash using the equity in their homes to secure a loan. It has been expected that reverse mortgages will grow as the American population ages. But these mortgages are risky products that the intended consumers—older people, who sometimes live on little income—might not fully understand. Regulators, therefore, require lenders to make certain disclosures to people who are taking out a reverse mortgage.
However, providing disclosures will not automatically remove the possibility of predatory or deceptive lending. Some advocacy groups—Consumer Advocates Against Reverse Mortgage Abuse (CAARMA), for example—suggest that the federally backed reverse mortgage structure needs to be transformed because the loans often lead to bad outcomes. In particular, they argue that “thousands and thousands of heirs are prevented from satisfying the reverse mortgage loan,” resulting in lost inheritances, and that half of surviving non-borrowing spouses will not be able to stay in their home after the borrowing spouse dies.
- Under federal and state laws, reverse mortgage lenders must make certain disclosures to prospective borrowers.
- Often, borrowers are also required to go through reverse mortgage counseling and may be required to undergo a “cooling off” period after counseling before fees can be assessed.
- Some consumer advocates suggest that the federally backed mortgage structure needs to be transformed to protect vulnerable older homeowners.
Disclosures Under Federal Law
There are some things that reverse mortgage lenders can’t do, but there are also things that they have to do.
Federal laws state that reverse mortgage lenders can’t perform “unfair or deceptive” practices. Section 5 of the Federal Trade Commission Act, for example, applies to reverse mortgages. Lying to or misleading potential borrowers about the terms of a reverse mortgage loan isn’t legal, for instance. Lenders also aren’t allowed to use the Federal Housing Administration (FHA) logo or falsely imply that their services originate from the government.
In addition, according to Regulation Z of the Truth in Lending Act (TILA), lenders must make specific disclosures to people who apply for a reverse mortgage. These include:
- A notice that just because you apply for a reverse mortgage doesn’t mean you have to go through with it, even if an application was signed.
- A good faith estimate (GFE), a form that the lender provides to explain the bare bones of the loan. It is meant to allow you to get a sense of how much the loan will actually cost or to compare loans.
- An itemized list of the loan, including the charges for the loan, its terms, the appraisal values used for the home, and the age of the youngest borrower.
- An explanation of the table of total annual loan cost (TALC) rates. The table gives the annual percentage cost of a reverse mortgage, based on preset loan periods and assumed annual house appreciation, according to explanations of TALC calculations.
Regulation Z protects consumers from misleading practices by the credit industry and provides them with reliable information about the costs of credit.
Disclosures Under State Laws
There are also state laws protecting reverse mortgage consumers.
Amy Loftsgordon, an attorney at Nolo, notes that over the years, states have begun to pass laws to protect older people from deceptive advertising. For example:
- Maryland has mandated that lenders send a checklist to would-be borrowers that advises them to speak with a reverse mortgage counseling agency.
- Washington requires that a note, fitting certain guidelines, be sent to potential borrowers, telling them that they have to receive counseling before getting a reverse mortgage.
- California has a mandatory seven-day “cooling off” period. After a potential borrower goes through the mandatory counseling session, they must wait at least seven days before the lender can assess fees.
Are Disclosures Actually Being Made?
Defaults on reverse mortgages may be trending up. An increasing number of home equity conversion mortgages (HECMs)—the most common type of reverse mortgage, and the only type that is federally backed—have defaulted, according to a 2019 Government Accountability Office (GAO) report. HECM defaults rose from 2% of loan terminations in 2014 to 18% in 2018, the report found. This was mostly due to borrowers failing to meet occupancy requirements or pay taxes or insurance, the report said.
The GAO report also listed several weaknesses in the FHA program that oversees HECMs, pointing out the need for better oversight to insure that loan servicers are following requirements, including those designed to help protect borrowers.
Litigation also may be increasing. Lawyers in states including West Virginia have reported that the number of consumer lawsuits over reverse mortgages has gone up in recent years.
It’s somewhat unclear from outside the industry what percentage of lending is unscrupulous, although stories of unscrupulous lenders have proliferated. A 2019 investigation published in USA Today, for example, alleged that nearly 100,000 loans were foreclosed in a “stealth aftershock of the Great Recession,” lowering property values for entire neighborhoods—mostly underprivileged, urban, and Black—across the United States. That investigation was controversial within the reverse mortgage industry.
Does a reverse mortgage affect your heirs?
It certainly can. When a borrower dies, it can trigger repayment of the reverse mortgage. Your heirs will have to pay off either the balance of the loan or 95% of the home’s appraised value, whichever is lower. Your heirs get 30 days after receiving a notice from the lender to do that, or else give up the home.
What is prohibited in reverse mortgage advertising?
Lenders can’t say that their products are co-signed or otherwise endorsed by the federal government, nor can they use official government logos.
How are reverse mortgages paid back?
Often, a reverse mortgage will be paid back using the money from the home’s sale.
The Bottom Line
Reverse mortgage lenders have to make certain disclosures to borrowers, as required by federal and state laws. The disclosures are meant to give the borrower insight into reverse mortgages and the process surrounding them, and at the state level, they often involve a notice that the borrower will have to go through some form of counseling. (Counseling is also required to receive a federally backed HECM loan.) Notably, though, consumer advocates and lawyers warn that reverse mortgages can be beset by hidden fees and deceptive practices, making them risky for older people looking to use them to draw on the equity in their homes.