Seniors, especially older retirees who haven't worked for years and whose income from savings or investments may be limited, can be house rich but cash poor. They've paid off most or all of their home loan. Yet they can find themselves in a financial bind when they need more money than they have available.

A reverse mortgage is a type of mortgage loan that can help those in such circumstances. It's intended for homeowners age 62 or older with significant home equity.

With a reverse mortgage, homeowners can borrow money against the value of their homes and take the money in various ways. For example, they can obtain the loan as either a lump sum or a regular and fixed monthly payment. Or it can be delivered to them as a line of credit.

Importantly, the money loaned to them becomes due only after they die, move out of the home permanently, or sell it.

It's an appealing financial proposition when lack of cash is, or may become, a persistent problem. However, there have been some troubling issues related to how reverse mortgages are advertised. Read on to learn about the federal and state regulations that have been put in place to protect consumers.

Problems With Reverse Mortgage Advertising

There always seem to be an endless plague of scams that target seniors and their money. Reverse mortgages have been included in these.

That aside, reverse mortgages have inherent risks which every potential borrower must consider. For example, it's possible that after a homeowner's death, the remaining spouse or children might lose the family home. Potential fees (closing and ongoing) can affect your liquidity, as well.

Harmful Advertising

However, in addition to the product's legitimate potential pitfalls, there also have been instances in which reverse mortgages have been described or advertised with false claims.

For example, a California-based reverse mortgage broker falsely told potential customers that a reverse mortgage would mean no payments. The broker further claimed that borrowers would not be subject to costs associated with refinancing a reverse mortgage.

The fact is, people who take out a reverse mortgage do incur a range of costs, including fees for closing, appraisals, title insurance, and property, insurance, and maintenance fees.

Because of consumer confusion, some states have passed laws that prohibit what lenders can and can’t state when they promote reverse mortgages. These rules are in addition to federal regulations that control how mortgages can be advertised.

Moreover, the CFPB has repeatedly raised concerns about how reverse mortgages are advertised. In a 2015 report, the agency stated that after viewing advertisements for reverse mortgages, “consumers were confused about reverse mortgages being loans, and they were left with false impressions that they are a government benefit or that they would ensure consumers could stay in their homes for the rest of their lives.”

Federal Laws on Reverse Mortgage Advertising

Mortgage advertising is a heavily regulated part of the financial services market. In part, that's because property is usually the single biggest purchase that most people will ever make.

Broad Regulation

To prevent unscrupulous lenders from taking advantage of borrowers, mortgage advertising is regulated by federal law. The most important of these laws are the Mortgage Acts and Practices Advertising Rule (MAPs Rule), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010.

The MAPs Rule, also known as Regulation N, controls the way mortgage services as a whole are advertised, making deceptive claims illegal.

Specific FHA Reverse Mortgage Regulation

In addition, there are rules that apply specifically to reverse mortgages. The vast majority of reverse mortgages in the United States are home equity conversion mortgages (HECMs), which the Federal Housing Administration (FHA) insures.

The 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.

Federal laws relating to reverse mortgage advertising are overseen by the Federal Trade Commission (FTC) and the CFPB, both of which have taken action against many mortgage lenders for false claims associated with reverse mortgage advertising.

State Laws on Reverse Mortgage Advertising

In addition to federal legislation, several states have passed laws that limit the way in which reverse mortgages can be advertised. 

Some of these laws, such as those in North Carolina and Tennessee, aim to further restrict the ability of reverse mortgage lenders to misrepresent how these loans work.

Others, such as the laws in effect in Oregon, define and require a number of disclosures—important pieces of information that the lender must communicate to the potential borrower—and specify that these must be prominent and not just appear in the fine print.

A number of states, rather than prohibiting certain types of advertising, have sought to protect consumers by enhancing the counseling session that all potential HECM borrowers must attend.

The U.S. Department of Housing and Urban Development (HUD) requires that all prospective HECM borrowers complete this counseling session. HUD requires the counselors to detail the pros and cons of taking out a reverse mortgage.

The Bottom Line

A number of federal and state laws control the way that reverse mortgages can be advertised. They make it against the law for mortgage brokers, lenders, servicers, and advertising agencies to make deceptive claims in mortgage advertising and other commercial communications sent to consumers. Despite these rules, the CFPB has been concerned about the way that reverse mortgages are promoted. Therefore, consumers should be wary of advertisements that present this product as a source of income or a government benefit. Reverse mortgages are a loan, and they should be treated as such.