What makes a reverse mortgage ad ‘deceptive’?

Jul 07, 2014 Marcie Geffner,HSH.com

Senior homeowners shopping for a reverse mortgage need to be on alert for false, misleading or deceptive advertising.

The risk is so serious that the Federal Housing Administration (FHA) recently issued a letter reinforcing its prohibition against misleading or deceptive advertising and reminding lenders to make sure seniors are fully informed of all their options when they apply for an FHA reverse mortgage.

Part of the U.S. Department of Housing and Urban Development (HUD), the FHA insures reverse mortgages through its Home Equity Conversion Mortgage program (HECM).

Protection against misleading ads

The FHA wants to protect older borrowers from misleading ads and lender presentations that seem to limit their choices, rather than inform them of the full range of offerings. The presentation of only particular products, rather than the full range of FHA reverse mortgages isn't allowed.

Talking to your parents about a reverse mortgage

Talking to your parents about their finances, let alone a reverse mortgage, is never easy. But for children to discuss reverse mortgage options with their parents, they themselves must first understand what the loan entails. Eric Tyson, co-author of "Mortgages for Dummies," says the first question for a parent should be: Do you want to keep living in your own home? To learn more, be sure to read our article, “Is a reverse mortgage OK for your parents?”

“This guidance is intended to make sure lenders know we’re keeping a watchful eye on their marketing and advertising practices that might steer borrowers toward reverse mortgage options that limit their available choices,” FHA Commissioner Carol Galante said in a statement.

Lenders must explain all the requirements in clear and consistent language and can't mislead seniors into thinking the reverse mortgage contains any features or limits that aren't consistent with the FHA requirements.

Borrowers: What to look out for

For example, lenders must explain that:

FHA insures fixed-rate mortgages as well as annual and monthly adjustable-rate mortgages (ARMs)

Fixed-rate mortgages are limited to a single lump sum payment with a one-time draw at closing

ARMs allow five payment options and future draws after closing, and the borrower can change the method of payment at any time if funds are available

The amount of funds available is determined by the youngest borrower's age

The disbursement of funds during the initial 12-month disbursement period is subject to an initial disbursement limit

Appropriate marketing materials

Lenders can't state or imply that being approved to participate in FHA programs means the FHA or HUD has endorsed their products.

Lender's advertisements and marketing materials must include a prominently displayed disclaimer that clearly states the materials aren't from HUD or FHA and haven't been approved by HUD or FHA. Seniors should be very wary of any ads or marketing materials that suggest otherwise.

“Senior borrowers deserve freedom of choice when considering whether a reverse mortgage is appropriate for them,” said Galante.