What’s Prohibited in Reverse Mortgage Advertising?

Seniors and retirees who haven’t worked for many years may face the challenge of limited income from savings and investments. Although they own their home outright, they find themselves house-rich but cash-poor. As a result, they might experience financial struggles when they have inadequate cash to meet their financial needs.

A reverse mortgage can help those with limited cash flow by allowing homeowners to borrow against the value of their homes. A reverse mortgage is a type of mortgage loan intended for homeowners age 62 or older with significant home equity.

Homeowners can receive the loan proceeds as a lump sum, fixed monthly payment, or line of credit. Unlike a traditional mortgage, where the borrower makes monthly payments to repay the loan, a reverse mortgage pays the borrower. The loaned money becomes due only after they die, move out of the home permanently, or sell it.

A reverse mortgage can benefit those needing income or cash in retirement. However, troubling issues have surfaced regarding the practices of reverse mortgage advertising. Read on to learn about the federal and state regulations that exist to protect consumers.

Problems With Reverse Mortgage Advertising

Unfortunately, there appears to be no shortage of fraudsters targeting seniors and their money, including reverse mortgage scams.

That aside, reverse mortgages have inherent risks which every potential borrower must consider. For example, it’s possible that after a homeowner’s death, the remaining spouse or children might lose the family home. Potential fees (closing and ongoing) can also affect your liquidity.

Harmful Advertising

There have been instances in which reverse mortgages have been described or advertised with false claims.

For example, a California-based reverse mortgage broker falsely told potential customers that a reverse mortgage would mean no payments. The broker further claimed that borrowers would not be subject to costs associated with refinancing a reverse mortgage.

On the contrary, people who take out a reverse mortgage incur a range of costs, including fees for closing, appraisals, title insurance, and property, insurance, and maintenance fees.

Because of consumer confusion, some states have passed laws prohibiting what lenders can and cannot say when promoting reverse mortgages. These rules are in addition to federal regulations that control the advertising practices of mortgages.

Moreover, the CFPB has repeatedly raised concerns about the advertising practices used for reverse mortgages. In a 2015 report, the agency stated that after viewing advertisements for reverse mortgages, “consumers were confused about reverse mortgages being loans, and they were left with false impressions that they are a government benefit or that they would ensure consumers could stay in their homes for the rest of their lives.”

Federal Laws on Reverse Mortgage Advertising

Mortgage advertising is a heavily regulated part of the financial services market. In part, that’s because property is usually the single biggest purchase that most people will ever make.

Broad Regulation

Federal laws exist regulating mortgage advertising to prevent unscrupulous lenders from taking advantage of borrowers. The most important of these laws are the Mortgage Acts and Practices Advertising Rule (MAPs Rule), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010.

The MAPs Rule, also known as Regulation N, controls the methods used when advertising mortgage services, making deceptive claims illegal.

Specific FHA Reverse Mortgage Regulation

The vast majority of reverse mortgages in the United States are home equity conversion mortgages (HECMs), which the Federal Housing Administration (FHA) insures.

Specific rules exist that apply to reverse mortgages. The FHA regulates the advertising of FHA-backed loans. For example, lenders must explain all requirements and features of the HECM program in clear, consistent language to consumers.

The Federal Trade Commission (FTC) and the CFPB oversee the federal laws relating to reverse mortgage advertising. Both agencies have taken action against mortgage lenders for false claims associated with reverse mortgage advertising.

State Laws on Reverse Mortgage Advertising

In addition to federal legislation, several states have passed laws limiting the practices of reverse mortgage advertising. Some of these laws, such as those in North Carolina, aim to further restrict the ability of reverse mortgage lenders to misrepresent how these loans work.

Others, such as the laws in effect in Oregon, define and require several disclosures—important pieces of information that the lender must communicate to the potential borrower—and specify that these must be prominent and not just appear in the fine print.

A number of states, rather than prohibiting certain types of advertising, have sought to protect consumers by enhancing the counseling session that all potential HECM borrowers must attend.

The U.S. Department of Housing and Urban Development (HUD) requires that all prospective HECM borrowers complete this counseling session. HUD requires the counselors to detail the pros and cons of taking out a reverse mortgage.

The Bottom Line

Federal and state laws control reverse mortgage advertising. They make it against the law for mortgage brokers, lenders, servicers, and advertising agencies to make deceptive claims in mortgage advertising and other commercial communications sent to consumers.

Despite these rules, the CFPB has been concerned about the methods used to promote reverse mortgages. Therefore, consumers should be wary of advertisements that present this product as a source of income or a government benefit. Reverse mortgages are loans and should be treated as such.