Posted on Monday, December 20, 2010
The Federal Reserve has been rightly criticized for not protecting borrowers — and the economy — in the years before the financial crisis. Under the law, it had the power and the obligation to curb bad lending. It was warned, by Fed insiders and by consumer advocates, of lender recklessness. It still failed to act.
Now, the Fed has proposed a rule that could undermine an important borrower protection passed by Congress in 2008. Hasn’t anything been learned?
At issue are reverse mortgages, which let homeowners, starting at age 62, borrow against their home equity without monthly repayments. Instead, fees and interest are added to their balance, with the total repaid later, often by selling the home when the owner dies.
The 2008 law prohibited “cross selling,” in which lenders required reverse-mortgage borrowers to use some of the loan proceeds to buy other financial products, such as annuities or long-term care insurance policies, that in many instances made no sense for the borrowers.
The Fed has proposed a much weaker prohibition that would allow lenders to sell financial products to reverse-mortgage borrowers as long as the purchase occurred at least 10 days after the loan was made. As the AARP and other advocates have pointed out, the proposal is at odds with both the 2008 law and this year’s Dodd-Frank reform law, which requires the new Consumer Financial Protection Bureau to study and update the rules for protecting reverse-mortgage borrowers.
The proposal could not come at a worse time. Reverse mortgages, once the purview of cash-strapped elderly widows, are becoming more popular — growing from roughly 8,000 in 2001 to about 118,000 in 2009.
The increase is due partly to the recession, which has squeezed retirees, and partly to more aggressive marketing. Wall Street investors have recently become bigger buyers of reverse mortgages that are packaged into securities. That has made reverse lending more profitable, causing lenders to push the loans harder. If all of this sounds chillingly familiar, it should.
In other echoes of the mortgage meltdown, consumer advocates have warned of borrower confusion over the loans’ complex terms and fees, and of a lack of understanding about alternatives. If the loans go bad, taxpayers could once again be on the hook, since most reverse mortgages have government backing.
Reverse mortgages can be a helpful way to make ends meet, but there is no question that they require more, not less, oversight. And reverse-mortgage borrowers need more, not less, protection. The Fed’s proposal should be withdrawn.