CFPB Issues Report to Congress on Reverse Mortgages

July 24, 2012

On June 28, 2012, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a report to Congress on reverse mortgages, as required by Section 1076 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). In its report, the CFPB expressed concern that consumers do not understand reverse mortgages and indicated that new regulations and stricter CFPB supervision over reverse mortgage originators can be expected in the future.

The Issue: In addition to describing the history of reverse mortgages and examining consumer demographics, behaviors, and risk the CFPB’s repot explained the changing nature of the reverse mortgage market and provided an overview of the existing regulatory structure governing reverse mortgages. Significant areas of the report focused on the following consumer protection concerns and proposed solutions:

  • Recommendations for New Regulations: Relying heavily on a survey of housing counselors commissioned by the AARP, the CFPB asserts that borrowers do not understand reverse mortgages. For example, the CFPB report contends that borrowers have trouble understanding that the balance of the mortgage will increase over time—not decrease, as traditional mortgages do. Additionally, according to the Bureau, borrowers may not understand that a spouse or family member who is not named as a borrower on the reverse mortgage will not be able to remain in the home following the borrower’s death. To address these apparent borrower misunderstandings, the CFPB indicated that it will “undertake a project to improve and integrate TILA and RESPA disclosure requirements for reverse mortgages.” As part of this project, the CFPB indicated that it will consider a 2010 proposal by the Board of Governors of the Federal Reserve that would have placed limits on advertising, improved disclosures, and closed regulatory gaps related to cross-selling.[1] The CFPB indicated that it will also consider whether any additional regulations are necessary or appropriate.
  • Indication of Increased Enforcement and Supervisory Actions: The CFPB indicated that it intends to monitor the reverse mortgage market for “unfair, deceptive or abusive practices and compliance with existing laws” and that it will take enforcement and supervisory actions if necessary. The report specifically noted that the nonbank entities who dominate the current reverse mortgage market and who would previously have been exempt from federal regulation are now subject to CFPB supervision. The CFPB also indicated that it will work with the Department of Housing and Urban Development (“HUD”) to develop further consumer protections, in areas over which HUD has influence through HUD’s Home Equity Conversion Mortgage (“HECM”) program. The CFPB will also be accepting complaints directly from consumers and will work with lenders to resolve those complaints.
  • Effect of Trends in the Reverse Mortgage Marketplace: The CFBP noted that since the Federal Housing Administration issued guidance in 2008 clarifying that HUD-insured reverse mortgages could be structured as closed-end fixed-rate loans, the reverse mortgage market has markedly shifted from relying primarily variable rate loan products with borrowers taking monthly disbursements or maintaining an open line of credit, to favoring closed-end fixed-rate loans with borrowers taking a large lump sum payment of equity at closing. This shift has been exacerbated by the recent exit of certain large players from the reverse mortgage market,[2] and, in the CFPB’s opinion, has adversely affected borrowers. In particular, the CFPB posits that the market preference for fixed-rate loans has encouraged borrowers to take a larger equity cash-out than they would otherwise have done under a monthly payment or line-of-credit, and that this has left seniors in danger of having no home equity to cover large expenses in retirement including long-term care. The CFPB also expressed concern that the convenient availability of lump sum equity loan products has left seniors vulnerable to fraud.
  • Call for Further Study: The CFPB indicated that, in order to determine the need for additional consume education or regulatory action, further research is required in the following areas: (1) the factors which influence consumer selections among available reverse mortgage products; (2) consumer use of reverse mortgage proceeds; (3) longer-term outcomes of reverse mortgages, including the reasons why borrowers typically pay off the loans before they die; and (4) the differences in market dynamics and business practices among the broker, correspondent and retail lending channels.

The CFPB has also published a Request for Information in the Federal Register on July 2, 2012. The request seeks information from the public “on the factors that influence reverse mortgage consumers’ decision-making, consumers’ use of reverse mortgage loan proceeds, longer-term consumer outcomes of a decision to obtain a reverse mortgage, and differences in market dynamics and business practices among the broker, correspondent, and retail channels for reverse mortgages.”[3] Comments will be due on August 31, 2012.

Implications: The report suggests that the CFPB intends to take an active role in shaping the reverse mortgage origination and servicing, by imposing new disclosure requirements, potentially changing or limiting the scope of reverse-mortgage products that are HUD-insured, and increasing enforcement activities over nonbank originators. Lenders, investors, and servicers operating in the reverse mortgage market should monitor the CFPB’s ongoing research and rule development in this area and leverage comment opportunities.

Elizabeth L. McKeen - (949) 823-7150  emckeen@omm.com
Edgar Martinez - (949) 823-7143  emartinez@omm.com
Ashley Pavel - (949) 823-7138  apavel@omm.com

[1] The report uses the term “cross-selling” to refer to the practice whereby a borrower obtains a reverse mortgage and then invests the proceeds into an annuity or other product offered by the originator.
[2] Key originators that have exited the reverse mortgage market since 2011 include Wells Fargo, Bank of America, Financial Freedom, and MetLife.
[3] 77 FR 39222 (July 2, 2012), available here.