Consumer Protection and Your Rights

Reverse mortgages are complex financial transactions, and the borrower needs to be aware of many different issues when evaluating a loan offer.  One of the best protections you have with reverse mortgages is the Federal Truth in Lending Act, which requires lenders to inform you about the plan's terms and costs.

Among other information, lenders must disclose the Annual Percentage Rate (APR) and payment terms. On plans with adjustable rates, lenders must provide specific information about the variable rate feature. On plans with credit lines, lenders also must inform you of any charges to open and use the account, such as an appraisal, a credit report, or attorney’s fees.

New rules require that total cost estimates illustrate at least three loan periods (short-term, life expectancy and long-term) and three likely appreciation rates (the predicted percentage increase in the home's value over the loan period).

Consumer Safeguards

As record numbers of senior homeowners use reverse mortgages as part of their retirement financial management, numerous safeguards have been built into today’s reverse mortgage programs.  Broader understanding of these consumer protection features is responsible for wider acceptance of reverse mortgages, leading to nearly 500% growth in origination volume from 2001 to 2004 (from 7,781 FHA HECM loans in 2001; to 37,829 in 2004).

Although all reverse mortgage products available in the marketplace work similarly, the most popular program is the Home Equity Conversion Mortgage, or HECM, administered through the U.S. Department of Housing and Urban Development (HUD).  The safeguards specific to this type of reverse mortgage include:

• Standard & Capped Interest Rates
  The interest rate is the same no matter which lender a senior chooses, and is adjusted either monthly or annually (the borrower chooses).  The rates are based on the 1-year U.S. Treasury Constant Maturity Rate published by the Federal Reserve.


• Limitation on Fees
  Origination fees are limited by HUD regulations and may be financed as part of the reverse mortgage. This means a senior incurs very little out-of-pocket expense to get a reverse mortgage.

• Advance Disclosure
  The Total Annual Loan Cost, or “TALC” disclosure, required by the Federal Reserve Board, is provided to the prospective reverse mortgage borrower and displays the total transaction costs over the projected life of the loan.


• Independent Counseling
  Before a reverse mortgage application can be processed, the prospective borrower must first meet with an independent counselor. Both HUD and AARP oversee a network of counselors whose job is to review the transaction, answer any questions the borrower may have about reverse mortgages and suggest alternative options.


• No Maturity Date
  A reverse mortgage cannot become due during the homeowner’s lifetime. It is a permanent tool. The fact that there are no required payments and there is a lifetime right to occupy the home provides great protection against unforeseen or unanticipated future circumstances, rendering reverse mortgages vastly safer than other loan alternatives.


• No Prepayment Penalty
  Although the loan is not due and payable until the senior permanently moves out of the home, it can be paid-off at any point prior with no additional fees or costs.


• Asset Protection
  The HECM is a “non-recourse” loan. This means that the amount due can never exceed what the home is worth.  Title to the home always remains with the borrower. When the loan becomes due, the lender is repaid the sum of funds advanced plus the accrued interest, but never more than the value of the house. If there is remaining value, it belongs to the homeowner or the estate.