USA: Reverse mortgages pose risks for older consumers
08 Dec 2010
Consumers Union (CU) recently released the results of a
study into the growing market for reverse mortgages. Finding these
products come with big risks and high costs for older consumers, CU
is calling for stricter oversight of market and stronger consumer
protection for borrowers.
Reverse mortgages allow home-owners in the US aged 62 years old
and above to release some of the equity in their home in order to
supplement their earnings in retirement with cash payments or lines
of credit. The loan is normally repaid with proceeds from the sale
of the home after the borrower dies or moves into care.
But reverse mortgages are a complex financial product, and CU's
report raises concerns that increasing numbers of older
consumers are being misled into squandering their main financial
assets prematurely and risk losing their homes.
"Reverse mortgages are a very risky deal for borrowers who don't
understand the complicated terms of the loan and how quickly fees
and interest charges can add up," said Norma Garcia, Senior Staff
Attorney at CU. "Reverse mortgages should only be a last resort for
seniors who want to stay in their homes and have no other
alternatives to supplement their income."
Older consumers were found to be the target of misleading
marketing of these products, as well as aggressive cross promotion
of other financial products that were often unsuitable. CU also
notes that reverse mortgages are being increasingly promoted to
consumers other countries in including India, Taiwan, Australia,
Canada and the UK.
The report, entitled Examining
Faulty Foundations in Today's Reverse Mortgages, was jointly
undertaken with California Advocates for Nursing Home Reform and
the Council on Aging Silicon Valley. The authors have made a number
of recommendations to reform the market:
Ensure loans are suitable for borrowers Lenders
and brokers should be required to consider whether the loans put
borrowers at risk of losing their homes, if the borrower
understands the complex nature of the contract, and if there are
more viable alternatives available to the borrower.
Establish a fiduciary responsibility for the
loan Lenders and brokers must be required to act in the
best interests of the borrower and should be held liable for
violating this fiduciary duty.
Outlaw deceptive marketing All reverse
mortgages should be required to include information to help
borrowers determine whether the loans are suitable for them.
Adopt stronger prohibitions on cross promotions
Prohibitions against cross promotions of other financial products
by lenders and brokers should extend to non-HECM (Home Equity
Conversion Mortgage) loans. Insurance agents and brokers should be
held liable for selling an annuity when it is purchased with
reverse mortgage funds.
Strengthen the quality and content of
counselling HUD (US Dept. of Housing and Urban
Development) counsellors should be required to hold an in-person
session with prospective borrowers to determine whether a reverse
mortgage is suitable for the borrower. The counsellor should deny a
counselling certificate to the borrower if the loan is not in the
best interest of the senior.
Protect non-borrowing spouses and tenants
Spouses and tenants whose names are not on the reverse mortgage
loan should be notified about their limited rights to remain in the
home after the borrower dies or permanently moves out of the
CI is calling for the G20 take action to strengthen financial
consumer protection. See Consumers for Fair Financial Services to
find out more.
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