October 12, 2009
Are Senior Citizens the New Targets for Predatory Lenders?
by Robert Kropp
The National Consumer Law Center finds an increase in reverse mortgages directed at older
homeowners, and details potential opportunities for abuse by lenders.
Predatory lending practices in the home mortgage market, which were the primary forces that led to
the current economic crisis, targeted many of society's most vulnerable members. As an attitude of
business as usual has returned to Wall Street, should it be a surprise to anyone that many of the
same players in the subprime market have now turned their attention to another vulnerable segment
Reverse mortgages, available to homeowners age 62 or over who have
little or no mortgage debt, "continue to grow despite the economic downturn, with volume more than
doubling between 2005 and 2008," according to a recently published report by the National Consumer Law Center (NCLC). The report predicts
that 2009 "appears to be on pace for a record year."
In a consumer advisory issued in
September, the Office of the Comptroller of the
Currency (OCC) defined reverse mortgages as "complex, home-secured loans. Under a reverse
mortgage, a consumer receives payments from the lender – either over time or all at once – based on
the value of the home at the time of the loan. As the consumer receives payments, and interest and
fees accrue, these amounts are added to the loan balance."
Because loan fees associated
with reverse mortgages are based on the value of the home, and not the amount of money borrowed,
they can be very expensive, according to the AARP. As a result, leaving a home to an heir debt-free may be
difficult for the borrower.
According to the NCLC report, entitled Subprime Revisited: How
the Rise of the Reverse Mortgage Lending Industry Puts Older Homeowners at Risk, "the
continuing availability of reverse mortgages is good news for seniors who need to cash out some of
their housing wealth." However, the report warns that "growth in the reverse mortgage market has
unleashed other, more malign forces."
The report reveals that some of the same players in
the subprime lending market have now turned their attention to reverse mortgages. Wells Fargo, for
instance—a recipient of $25 billion in Troubled Asset Relief Program (TARP) funds—was a leading
subprime lender in 2006. In 2008, Wells Fargo originated nearly 20,000 reverse mortgages, while
espousing its responsible mortgage lending principles. But despite those principles, Wells Fargo
was targeted in a lawsuit by the City of Baltimore for its subprime lending practices. The Attorney
General of Illinois has also filed a complaint against Wells Fargo. Because of lending track
records such as that of Wells Fargo, the report advises that "Claims by lenders that they will
protect the interest of consumers in the lending process should be approached with caution."
Perhaps of particular concern is the report's finding that "securitization, which allowed
subprime loan originators to disassociate themselves from the downside risks of abusive lending, is
becoming commonplace in the reverse mortgage industry."
Because reverse mortgages carry so
much risk, homeowners who receive a federally insured Home Equity Conversion Mortgage
(HECM) must first receive counseling. But proprietary reverse mortgages, which are sold by
private financial institutions, have no such requirement, according to the NCLC report.
Furthermore, the NCLC found that counseling under HECM requirements is often inadequate.
Concluding that "Federal and state governments must act now to ensure that reasonably priced
and fairly structured reverse mortgages are available for those who truly need them, and that
vulnerable seniors are protected from predatory or abusive lending practices," the report offers
several recommendations. A suitability standard should be enacted for all reverse mortgages, and
yield spread premiums—which reward brokers for steering borrowers to loans with higher interest
rates—must be banned.
Private equity conversion products, which are sold by private
financial institutions, must be regulated, and effective data on all reverse mortgages should be