As part of the many proposals from the Federal Reserve last week, a new report details the work done to develop new reverse mortgage disclosures and shows that while misconceptions about the product remain, consumer protections have improved.
Conducted by ICF Macro, the research consisted of two rounds of focus groups held in Bethesda, MD and St. Louis, MO. To assess participants’ general understanding of reverse mortgages, those without a reverse mortgage were first asked to explain how they thought the product worked. At the end of the discussion, current reverse mortgage holders were asked to share their understanding of the product.
“Responses in all four focus groups were mixed,” says the report. “Several participants appeared to have a good understanding of the positive and negative features of reverse mortgages, while some individuals did not understand or had misconceptions about the product.”
The most common misconceptions include the belief that by getting a reverse mortgage, a borrower is signing their home over to the bank, but the report also shows that borrowers are understanding key concepts about the product better than before.
One of the most heated topics in the industry is how to manage loans when borrowers fail to keep current on their taxes and insurance. The report found that all reverse mortgage holders and some participants without a reverse mortgage understood that “the homeowner is still responsible for paying taxes and insurance on the property.”
Additionally, even as many politicians and consumer advocates declare that abuses from reverse mortgage lenders selling other financial products remain, the focus groups found just the opposite. ”No one indicated that they were encouraged to purchase another financial product, such as an annuity, with proceeds from their reverse mortgage,” says the report. “In fact, one person said that he had to sign a waiver that he would not buy an annuity with the proceeds.”
However, there were several areas where borrowers were confused. For example, borrowers expressed confusion about the mortgage insurance paid on the HECM loan. According to the report, participants in three of the four groups either did not understand why mortgage insurance was included on the form or were unsure of how it was to be paid. When asked who they thought collected the insurance on the loan, “all participants assumed these payments were given to the lender,” says the report.
IFC Macro also found that none of the participants in the study understood how to read the Total Annual Loan Costs (TALC) rate table. Because of this, ICF Macro and the Board developed and tested alternative ways to present information about the costs using tables and bar charts to explain how the balance would grow over time. Most of the changes were made to the explanatory text that accompanied the table, as well as table labels and column headings. However, none of these changes were effective; participants continued to be very confused by the TALC rates. For this reason, the Fed did not include it on its proposed model forms.
To help address a number of consumer misconceptions about reverse mortgages not addressed by current disclosures, the proposal by the Fed would require creditors provide a two page document that explains how reverse mortgages work and important terms and risks to consider, rather than the current documents. The Fed said that by consolidating the reverse mortgage disclosures, “the proposal would ensure that consumers receive meaningful information in an understandable format.”
To download a copy of the report, click here.