Reverse mortgages are so complex that borrowers frequently don't understand what they're getting into, the Consumer Financial Protection Bureau says. The CFPB doesn't yet know what to do about that.
The bureau has issued a report to Congress that explains how the market for reverse mortgages has changed over the past few years. According to the CFPB, reverse mortgages are so complicated now that hardly anyone can figure out which is the best type to get to address a particular consumer's situation. Should the reverse borrower get a fixed rate or adjustable rate? Lump sum or line of credit or monthly payments? Higher upfront fees with higher payments, or lower upfront fees with lower payments?
Not only do reverse mortgages make borrowers' brains hurt, they're being used differently than in the past, they are sometimes advertised misleadingly, mandatory counseling isn't always effective, and reverse borrowers are at particular risk of fraud, the CFPB's report says.
A reverse mortgage is a type of home equity loan that's available only to homeowners age 62 or older. The homeowner gets cash or a credit line, and interest accrues on the outstanding debt until the borrower dies or moves out of the house. After that milestone is reached, the loan must be repaid. Most often, that's accomplished by selling the house.
When there are two co-borrowers, repayment is due after the second borrower dies or moves out.
The CFPB's 231-page report is long on describing problems, whether existing or potential, and short on solutions. The bureau says it plans to improve the disclosure documents that borrowers get and will "consider whether other regulations are necessary and appropriate to protect consumers in the reverse mortgage market."
Other than that, the bureau says it will ask counselors about "the primary obstacles to good consumer decision-making about reverse mortgages," study ways to better explain trade-offs and benefits and risks of various types of reverse mortgages, monitor for unfair and deceptive trade practices, and accept complaints at its hotline: (855) 411-2372.
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