State Laws Crack Down on Reverse Mortgage Advertising

States are passing laws that restrict what can—and can’t—go in reverse mortgage advertisements.

In the course of selling reverse mortgage loans, lenders and brokers sometimes use deceitful advertising to convince seniors that a reverse mortgage is basically free money—an easy way to turn their home’s equity into cash.

To protect seniors from misleading sales tactics, some states have passed, or are in the process of passing, reverse mortgage laws. New York, for example, passed a reverse mortgage bill on May 21, 2019. Federal rules exist too when it comes to reverse mortgage advertising. These laws and rules usually prohibit lenders from engaging in unfair or deceptive practices when marketing or offering reverse mortgage loans, as well as require lenders to make certain disclosures in their advertisements.

Reverse Mortgage Advertising Is Often Misleading

Many senior citizens take out a reverse mortgage without fully understanding the product. It’s not uncommon for lenders to use advertising that’s designed to downplay the disadvantages of this kind of loan and keep borrowers in the dark about all of the mortgage requirements and obligations.

Some advertisements, for instance, tout reverse mortgages as a way to get "tax-free money." But a reverse mortgage is a loan, not income. So, of course, the loan proceeds aren’t taxed. Lenders and brokers who sell reverse mortgages also sometimes assure potential borrowers in their sales pitch that the loan is FHA-insured. This statement implies that the insurance protects the borrower or that the government endorses reverse mortgages. But this insurance program is not set up to help the homeowner—it’s to benefit the lender. If you can't pay off the loan when it comes due, you might lose the home to a foreclosure sale or other liquidation option. In either situation, the insurance makes sure that the lender gets paid in full.

Also, reverse mortgage advertisements regularly mention that the loan will not affect your Social Security or Medicare benefits, which is true. But these advertisements usually don’t say that a reverse mortgage could affect your eligibility for Medicaid. (To read more about misleading advertising tactics when it comes to reverse mortgages, see Reverse Mortgage Scams.)

Federal Laws That Restrict Reverse Mortgage Marketing

The vast majority of reverse mortgages in the U.S. are Home Equity Conversion Mortgages (HECMs), which the FHA insures. FHA regulates the advertising of FHA-backed loans, and has specific rules for reverse mortgages.

Under FHA rules, lenders must explain all requirements and features of the HECM program in clear, consistent language to consumers. Among other things, a lender has to disclose all of the following.

  • FHA insures fixed-rate and adjustable-rate reverse mortgages. Fixed-rate loans are distributed in a single lump sum with no future draws. Adjustable-rate reverse mortgages offer different payment options and allow for future draws.
  • The age of the youngest borrower determines the amount you can get with a reverse mortgage.
  • The amount you can get during the first 12-month disbursement period is subject to an initial disbursement limit.

Under FHA rules, lenders can’t use any misleading or misrepresentative advertising or marketing materials in connection with the HECM program. Lenders may not state that any of their products have been endorsed by FHA or the U.S. Department of Housing and Urban Development (HUD). Also, a lender generally isn’t allowed to use FHA or HUD logos or seals, or any other symbol that imitates an official federal seal in its advertising.

State Laws That Restrict Reverse Mortgage Advertising

Some states have passed (or are in the process of passing) laws that regulate reverse mortgage advertisements. North Carolina and Tennessee have laws, for instance, that prohibit lenders from:

  • misrepresenting material facts or making false promises in connection with reverse mortgages, or
  • engaging in a course of misrepresentation, through agents or otherwise, when making reverse mortgage loans. (N.C. Gen. Stat. § 53-270, Tenn. Code. § 47-30-115).

Under Oregon law, lenders have to give a summary of reverse mortgage terms—including costs, repayment options, and borrower responsibilities—in all advertisements, solicitations, or communications sent to prospective borrowers. Oregon law also requires the lender to include a clear and conspicuous summary of the terms of the reverse mortgage. The lender must disclose, among other things, all of the following.

  • At the conclusion of the term of the reverse mortgage loan contract, some or all of the equity in the property will no longer belong to the borrower. The borrower might need to sell or transfer the property to repay the proceeds of the reverse mortgage.
  • The lender charges an origination fee, a mortgage insurance premium, closing costs, or servicing fees for the reverse mortgage. The lender will add these charges to the balance of the loan.
  • The balance of the reverse mortgage loan grows over time, and the lender charges interest on the outstanding loan balance.
  • The borrower retains title to the property. Therefore, the borrower is responsible for paying property taxes, insurance, and maintenance—and failing to pay these amounts might subject the property to a tax lien (or other encumbrance) or to a possible foreclosure.
  • Interest on a reverse mortgage isn’t deductible from the borrower’s income tax return until all or part of the reverse mortgage is repaid. (Or. Rev. Stat. § 86A.196).

These disclosures can’t be in fine print: they must be clear and conspicuous. Oregon law defines "clear and conspicuous" as written in larger print than surrounding ad copy, presented in a different contrasting color, or separated from other text on the page. In television and radio ads, the disclosures must be "spoken in a volume and cadence that is sufficient to enable a reasonable person to hear and understand." (Or. Rev. Stat. § 86A.196).

In New York, a recently-passed bill (SB 4407) includes a prohibition on unfair or deceptive practices in connection with the marketing or offering of reverse mortgage loans. The bill specifically prohibits the use of the words “government insured” to represent that the government supports and sponsors reverse mortgages. The bill also:

  • requires lenders to provide specific notices about reverse mortgages to consumers
  • requires that independent counseling be provided to applicants
  • imposes restrictions related to verifying the home’s occupancy and related foreclosures (reverse mortgages require the borrower to live in the property as a primary residence, or the lender can call the loan due and foreclose if the borrower doesn't repay the loan), and
  • establishes a right of action with treble damages for violations of its provisions.

Talk to a Lawyer

Reverse mortgages are complicated and tricky—otherwise, states wouldn’t feel the need to regulate their advertising. If you’re thinking about getting a reverse mortgage, consider talking to a trusted financial planner or an attorney first. While borrowers do have to complete a counseling session with a HUD-approved counselor before getting this type of mortgage, one session might not give you sufficient information. Even after counseling, many borrowers still don’t understand all the terms and requirements of a reverse mortgage.

Effective date: May 21, 2019