Most American investors are likely aware of the SEC, and may also be aware of FINRA as an important regulatory institution (certainly, readers of this blog should be). But they may be less aware of the relatively new Consumer Financial Protection Bureau (CFPB), which also has a mandate to protect consumers from financial malpractice. The CFPB was created out of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and President Obama appointed its first director in January 2012. The CFPB website has a variety of resources for investors, including a frequently updated blog, and several research reports.
Last month, the CFPB released their latest report to Congress, on reverse mortgages (PDF of the full report available here). Reverse mortgages have become highly controversial, as they are primarily marketed to elderly homeowners who may not fully understand their structure and risks. FINRA released an Investor Alert on reverse mortgages in 2010.
A reverse mortgage is similar to a home equity loan, in that a homeowner can borrow against the equity in their home as either a lump sum payment, periodic payments over their lifetime, or as a line of credit. The homeowner is not required to make payments under a reverse mortgage (except for property tax and insurance), but is obliged to pay off the full amount either upon death or sale of the home, and any accrued interest is added to the mortgage balance.
From the CFPB:
Our study finds that reverse mortgages are complex products that are difficult for consumers to understand. Borrowers are also increasingly using reverse mortgages in ways that are different from what was intended. Nearly half of recent borrowers were in their 60s, and nearly 3 out of 4 borrowers took all of their money upfront in a lump sum. The Bureau is concerned that these borrowers will have fewer resources to pay for everyday and major expenses later in life.
Deceptive marketing is a long-standing problem in this market, with many older Americans receiving solicitations implying that a reverse mortgage is a government benefit rather than a loan. Prospective borrowers are required to attend counseling, but these deceptive advertisements and an increased array of product options make the counselor’s job very difficult.We will continue to follow the CFPB's research and advisory efforts about reverse mortgages and other consumer investment topics.