Reverse Mortgage Ads Misled Consumers, Complaint Charges

Reverse Mortgage Ads Misled Consumers, Complaint Charges
Photo by Kostiantyn Li / Unsplash

An Irvine, California, company is being accused of using inflated home estimates to lure consumers into taking out reverse mortgages. The Consumer Financial Protection Bureau (CFPB) leveled the charges against American Advisors Group (AAG).

“American Advisors Group violated consumers’ trust by advertising reverse mortgages with inflated and deceptive home-value estimates,” said Acting CFPB Director David Uejio in a news release.

Reverse mortgages are used primarily by seniors looking to convert some of the equity in their home into cash that they can use for everyday living expenses, an attractive option but one that can easily go wrong.  

American Advisors Group is one of the nation’s leading providers of reverse mortgages. It would be required to pay $173,400 in refunds to consumers and a $1.1 million civil penalty if the CFPB’s proposed consent order is approved by the court.

The company’s conduct violated a 2016 consent order that prohibited deceptive advertising, the CFPB alleges.

What is a reverse mortgage?

A reverse mortgage is a special type of home loan that allows homeowners who are 62 or older to access the equity they have built up in their homes  while putting off payback of the loan until they pass away, sell, or move out.

The loan proceeds are generally provided to the borrowers as lump-sum payments, monthly payments, or as lines of credit.

A major pitfall of the loans is that homeowners remain responsible for paying taxes, insurance, and home maintenance. If they fail to do so, the loan could go to foreclosure.

Potential problems with reverse mortgages that salespeople often aren’t eager to explain include:

  • You can’t move You must continue to live in the home. If you move, the loan becomes due.
  • Health problems If you become too ill to live in the house and move to a nursing home or other facility, the loan becomes due.
  • Your heirs When the homeowner dies, children or other inheritors will need to be able to pay off the remainder of the loan. If they can’t, they lose the house.
  • Your roommates Friends or relatives living with you? They’ll have to move out when you die unless they’re on the loan paperwork and are over 62.

Reverse mortgages can be useful in some cases but for seniors who are short of cash, they may be too risky. A better course of action might be to sell the home and use the proceeds to pay for rent and living costs.

Baby boomers are prime prospects

Aggressive salespeople have their sites set on the aging baby boomer generation, which had a storied young adulthood but now faces an under-financed old age, thanks to a lack of savings and pensions and, in many cases, a few too many divorces.

The Employee Benefit Research Institute has found that nearly half of retired boomers will lack sufficient income to provide for their basic needs. Another study found that fully 45% of boomers have no retirement savings. About 30 million boomers have already retired, with millions more to follow.

The lack of savings makes seniors vulnerable to jolly television ads and Internet postings by celebrities and sports figures who make ambiguous or misleading claims that feature phrases like “financial security” and “set for life.”  

“Don’t be suckered into buying a reverse mortgage,” a Consumer Reports article warned a few years ago. “Advertisements make them sound tempting but reverse mortgages can put your retirement at risk.”

Falsely enticed consumers

The CFPB alleges that AAG violated the Consumer Financial Protection Act of 2010’s (CFPA’s) prohibition on deceptive acts and practices. Specifically, the CFPB alleges that AAG:

  • Deceptively inflated home values In marketing their reverse mortgage products, AAG provided consumers with inflated estimates of home values. AAG’s actions were deceptive because they would lead a reasonable consumer to believe that the consumer could reap more proceeds from the reverse mortgage than were actually available.
  • Made deceptive representations about the accuracy of home estimates AAG’s marketing materials stated that it “makes every attempt to ensure the home value information provided is reliable.” In fact, AAG made no real attempt to do this, CFPB charges. AAG’s misrepresentations induced consumers to rely on AAG’s inflated estimates and to enter into negotiations with the company.
  • Violated 2016 administrative consent order In December 2016, the CFPB filed an administrative consent order against AAG for a variety of deceptive statements made in marketing materials that violated the CFPA. The order prohibited AAG from violating the CFPA for five years, or until December 2021. The deceptive acts and practices committed by AAG as described in this complaint violate the 2016 consent order.