A reverse mortgage is a loan against the borrower’s home that the borrower does not need to repay for as long as the borrower meets certain conditions. These conditions, among others, require that borrowers live in the home, pay property taxes and homeowners’ insurance, maintain the property, and retain the title in his or her name. Reverse mortgages typically are “rising debt, falling equity” loans, in which the loan balance increases and the home equity decreases over time. As the borrower receives payments from the lender, the lender adds the principal and interest to the loan balance, reducing the homeowner’s equity. This is the opposite of what happens in forward mortgages, which are characterized as “falling debt, rising equity” loans. With forward mortgages, monthly loan payments made to the lender add to the borrower’s home equity and decrease the loan balance. The HECM program began in 1988, when Congress authorized HUD to insure reverse mortgages to meet the financial needs of elderly homeowners. While HECMs can provide senior homeowners with multiple types of benefits, including flexibility in how they use the loan funds and protection against owing more than the value of the house when the loan comes due, HECM costs can be substantial. The volume of HECMs made annually has grown rapidly, rising from 157 loans in fiscal year 1990 to more than 112,000 loans in fiscal year 2008. In addition, recent years have seen a large increase in the number of lenders participating in the HECM program, with more than 1,500 lenders originating their first HECM in 2008, bringing the total number of HECM lenders to over 2,700. A number of federal and state agencies have roles in overseeing the reverse mortgage market. These agencies include HUD, which administers the HECM program and oversees entities that provide mandatory counseling to prospective HECM borrowers. In addition, the Federal Trade Commission (FTC), federal and state banking regulators, and state insurance regulators are involved with various aspects of consumer protections for HECM borrowers. Various state and federal agencies have some responsibility for assessing marketing for reverse mortgage products, including FTC, federal and state banking regulators, and HUD. The agencies each have a responsibility for different segments of the reverse mortgage market, but have reported taking few, if any, enforcement actions against an entity as a result of misleading reverse mortgage marketing. FTC has responsibility for protecting consumers against unfair or deceptive practices originating from nonbank financial companies, such as mortgage brokers. FTC officials said they have not systematically searched for potentially misleading reverse mortgage marketing, but noted that they are maintaining an awareness of the potential risks associated with reverse mortgage marketing and have formed a task force of state and federal regulators and law enforcement agencies, in part to learn about complaints related to reverse mortgages. In addition, the federal banking regulators—the Board of Governors of the Federal Reserve System (Federal Reserve), Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA)—include a review of reverse mortgage marketing materials in their compliance examinations of lenders for whom they have responsibility, but, because few of their regulated lenders offer reverse mortgages, they have not conducted many examinations that have included these loans. Like FTC, federal banking regulators are maintaining an awareness of the potential risks associated with reverse mortgages, which could include those associated with reverse mortgage marketing. For example, the Federal Financial Institutions Examination Council—the interagency body that includes the federal banking regulators and develops guidance for federal bank examiners—recently formed a working group on reverse mortgages. Finally, some HECM lenders are regulated at the state level, with HECM marketing materials subject to state compliance examinations. Information we obtained from 22 of the 35 state banking regulators that responded to our information request indicated that their states routinely examine marketing materials as part of compliance examinations. However, only 1 state banking regulator—the Idaho Department of Finance—reported taking action against a lender because of reverse mortgage marketing. In addition, HUD exercises limited regulatory authority over the marketing activity of HECM lenders to ensure that lenders’ advertisements do not imply endorsement by HUD or the Federal Housing Administration. HUD officials cited one instance in which it referred a lender to the Mortgagee Review Board for misrepresenting the HECM as a “government rescue loan.” However, HUD officials said they do not actively monitor HECM marketing, and do not review HECM marketing materials as part of routine assessments of HECM lenders. Some agencies with whom we spoke indicated that while complaints are one factor that could trigger more extensive assessments of marketing materials, they have received few, if any, complaints about reverse mortgage marketing. However, FTC officials noted that the low volume of complaints could be a result of consumers not being aware that they have been deceived, not knowing to whom to complain, or elderly consumers being less likely to complain. While the extent of misleading HECM marketing is unknown, our limited review of marketing materials found some examples of claims that were potentially misleading because they were inaccurate, incomplete, or employed questionable sales tactics. Among the materials we reviewed, we found 26 different entities that made potentially misleading claims in their HECM marketing materials. This group includes entities regulated by each of the federal banking regulators with whom we spoke, as well a s FTC and state regulators; it also includes both members and nonmembers of NRMLA. We selected seven advertisements that represented these claims and submitted them to the regulators for review. In general, the officials with whom we spoke agreed that the claims in six of the seven advertisements raised some degree of concern and might prompt further investigation. Several of the officials noted that they would need to consider the fuller context of the advertisement to determine if the claims were misleading and the level of action they would take if these six advertisements were the subject of complaints or compliance examinations. The six potentially misleading claims that we identified, and agency officials generally agreed raised concern, were as follows: “Never owe more than the value of your home”: The claim is potentially misleading because a borrower or heirs of a borrower would owe the full loan balance—even if it were greater than the value of the house—if the borrower or heirs chose to keep the house when the loan became due. This was the most common of the potentially misleading statements we found in the marketing materials we reviewed. This claim was made by HUD itself in its instructions to approved HECM lenders; however, in December 2008, HUD issued guidance to HECM lenders explaining the inaccuracy of this claim. Implications that the reverse mortgage is a “government benefit” or otherwise, not a loan: While HECMs are government-insured, the product is a loan that borrowers or their heirs must repay, not a benefit. Examples of this type of claim include the following: “You may be qualified for this government-sponsored benefit program,” and “Access the equity in your home without having to sell, move, or take out a loan.” “Lifetime income” or “Can’t outlive loan”: Although borrowers can choose to receive HECM funds as monthly tenure payments, even under this option, payments will not continue once the loan comes due (e.g., when the borrower moves out of the house or violates other conditions of the mortgage). “Never lose your home”: This claim is potentially misleading because a lender could foreclose on a HECM borrower’s home if the borrower did not pay property taxes and hazard insurance or did not maintain the house. Misrepresenting government affiliation: An example of this type of claim would include use of government symbols or logos and claims that imply that the lender is a government agency. Claims of time and geographic limits: These claims falsely imply that HECM loans are limited to a certain geographic area, or that the consumer must respond within a certain time to qualify for the loan. Examples include “must call within 72 hours,” and “deadline extended,” as well as the claim that a consumer’s residence is “located in a Federal Housing Authority qualifying area.” The potentially misleading marketing claims we identified suggest that some HECM providers may not be maintaining sufficient focus on or awareness of federal marketing standards. Furthermore, consumers who have not been cautioned about such claims could pursue HECMs with misunderstandings about the product. Therefore, the report we are issuing today recommends that HUD, FTC, and the federal banking regulators take steps to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims discussed in this testimony. Concerns exist that reverse mortgage borrowers could be vulnerable to inappropriate cross-selling, a practice involving the sale of financial or insurance products that are unsuitable for the borrower’s financial situation using the borrower’s reverse mortgage funds. While certain annuity products may be suitable for some HECM borrowers, such as those who wish to receive payments for life regardless of where they live, there is concern that elderly reverse mortgage borrowers may be sold other products that may be inappropriate to the borrower’s circumstances. For example, there is concern that elderly reverse mortgage borrowers may be sold deferred annuities, where payments may not begin for many years and high fees may be charged for early access to the money. Because cross-selling typically involves the sale of insurance products generally regulated at the state level, the role of federal agencies in addressing the issue of cross-selling in conjunction with HECMs has been limited and largely has been focused on consumer education and disclosures. However, with the passage of HERA, HUD now has responsibility for enforcing the cross-selling provisions in the legislation and is in the preliminary stages of developing regulations to implement them. The provisions are intended to curb the sale of unsuitable financial products to consumers using HECM funds.