QUESTION
Earlier this year, our federal regulator alleged that we were discriminating on reverse mortgages based on age. At this point, we are still trying to satisfy their requirements to remedy this issue.
Frankly, I don’t see how a HECM can be a focus of age discrimination since we originate them only for homeowners who are 62 or older. Senior citizens are usually people who are 62 or older.
Also, the regulator told us that our reverse mortgage advertisements had fair lending issues. Those concerns are all resolved now. But I need some clarification about the fair lending implications.
How does fair lending impact reverse mortgages?
And what types of advertisements can cause fair lending violations?
ANSWER
Fair lending compliance certainly applies to reverse mortgages. Just like traditional mortgages, reverse mortgages are subject to federal laws governing mortgage lending, including TILA, RESPA, and fair lending laws such as the Equal Credit Opportunity Act (ECOA). These laws and their respective implementing regulations set forth important protections for all mortgage borrowers, including reverse mortgage borrowers.
But, many protections are not tailored to the unique needs of reverse mortgage consumers. ECOA and its implementing regulation, Regulation B, set forth rules prohibiting discrimination by a creditor based on age (or race, color, religion, national origin, sex, or marital status) with respect to any aspect of a credit transaction. ECOA covers both intentional discrimination (i.e., disparate treatment) and also facially neutral practices that have a disparate impact on a prohibited basis, including age.
Regulation B also prohibits creditors from making statements to applicants or prospective applicants discouraging – on a prohibited basis – a reasonable person from making or pursuing an application.
Reverse mortgages are available only to consumers 62 years of age and older. Generally, the amount a consumer can borrow is partly a function of the consumer’s age. This is permissible under Regulation B. However, fair lending concerns can still arise in the reverse mortgage context. For example, if a lender that offers a range of lending products, including reverse mortgages, were to discourage creditworthy applicants over age 62 from applying for alternatives to a reverse mortgage, the lender could risk violating Regulation B.
State regulators have taken enforcement actions to combat unfair and deceptive marketing of reverse mortgages. Many administrative actions have centered not only on individuals and entities that make unfair or deceptive statements about reverse mortgages but also on those that misrepresent their ability and qualifications to offer reverse mortgages to consumers.
Many reverse mortgage lenders are also subject to UDAAP enforcement actions by the CFPB.[i] Some reverse mortgage lenders may also be subject to enforcement actions by the FTC.[ii]
Reverse mortgage advertisements are often a minefield of fair lending violations. Often, the violative ads confuse the consumer. Other ads tend to cause consumers to misunderstand one or more important features of the loans and the loans’ potential risks.
Here are a few of the fair lending issues we have found in our advertising compliance reviews. Keep in mind that these consumer reactions are in some way caused by the texts, various features, and delivery methods of the advertisements.
· Advertisements caused consumers to believe that the government provided reverse mortgages and that repayment would not be required, giving the impression that reverse mortgages are not loans.
· Some ads caused consumers to mistakenly believed that money received through a reverse mortgage represented home equity they had accrued over time and that there was no reason they would have to pay it back.
· Many ads either did not include interest rates or put them in the fine print, leading to consumers finding it difficult to understand that reverse mortgages are loans with fees and compounding interest like other loans.
· Certain advertisements were confusing due to being incomplete and inaccurate, such as ads implying or stating that borrowers cannot lose their homes or do not have to make monthly payments.
· Many ads claimed that reverse mortgage proceeds were "tax free," thus leading consumers to believe they would not have to pay property taxes.
· The bogus claim of "tax free" money was used in ads by giving the impression that reverse mortgages are a government-run program or benefit.
· Advertisements using language or images referenced the Department of Housing and Urban Development (HUD) or the Federal Housing Authority (FHA), signaling that the government was funding and operating a reverse mortgage program for senior citizens.
· Some advertisements created a false perception by stating or implying that the main benefit of a reverse mortgage was that consumers could remain in their homes "as long as they want" based on ads that said, "the title and deed remain in their name." This implied that having a reverse mortgage meant they could never lose their home. This is false because while reverse mortgage borrowers retain the title and deed, the loans are secured by a lien, and borrowers can, in fact, lose their homes. Reverse mortgage borrowers are responsible for several requirements, including paying property taxes, homeowner's insurance, and property maintenance. Failing to meet these requirements can trigger a loan default that results in foreclosure.
· Advertisements hid various terms and conditions in the "fine print." Indeed, in some cases, it is likely that consumers could not even read the ridiculously small fine print in the printed ads, and, for the most part, no consumers could read the fine print used in television ads. Ads that included information about borrower requirements typically did so in the fine print. Fine print generally addressed tax and insurance requirements, property maintenance and residency requirements, repayment terms, and other important loan details.
· Advertisements caused consumers to misunderstand the government's role because the ads stated that the loans were "government insured" or a "government-backed program." A few advertisements went so far as to use text and graphics, such as eagles and government seals, to imply that reverse mortgages are affiliated with or offered by the federal government.
[i] Dodd-Frank Act § 1031
[ii] 15 USC § 45
