A group of consumer advocates claim the Federal Reserve’s proposed rule to strengthen reverse mortgage protections could actually encourage predatory lending targeted at the elderly.
According to the Fed, the proposal would improve the disclosures consumers receive for reverse mortgages and impose rules to ensure advertisements contain accurate and balanced information. But the the Center for Responsible Lending, the National Consumer Law Center, the National Association of Consumer Advocates, the California Reinvestment Coalition, the National Fair Housing Alliance and others have urged the Fed to withdraw its proposed regulations under the Truth in Lending Act because it would be particularly harmful to senior citizens.
The groups say that although some parts of the Fed’s proposal are positive, on balance they believe that “some of the proposals are extremely damaging to consumers and to preservation of homeownership, and are beyond the Board’s authority.”
Specifically, the groups say the proposal would open the door to recourse reverse mortgages, where borrowers could owe more than their home is worth. “This is a breathtaking and dangerous change,” said the groups in a letter, “it would deprive consumers of the longstanding protections afforded to their personal assets and their estates by the non-recourse limitation.”
The advocates also express concern about the growth of the fixed rate reverse mortgage product, which requires borrowers withdraw all of the proceeds at closing. “Besides using a reverse mortgage for purchase, there are few justifications for the withdrawal of a major amount of one’s life savings said the comment letter. “Unlike withdrawals from bank accounts, the effects of the withdrawals are very difficult for most consumers to understand.”
The group recommends that Fed require a healthy suitability standard whenever there is a lump sum distribution of more than 50% of the maximum draw unless there is a certification from an independent party (like a HUD certified housing counselor) that the withdrawal is necessary. They deem the following as necessary; a health need of one of the owners, saving the house, some other bona fide reason, not to include any financial planning. Additionally, the certification must be accompanied by independent verification: a foreclosure notice, a pending lawsuit, an unpaid medical bill, or similar real needs which justify the depletion of one’s life savings said the letter.
A copy of the comment letter is available here.