Dodd/Frank established the Consumer Financial Protection Bureau (CFPB) after the financial crisis to protect consumers in financial markets, but it does not tell the agency how to do it. The need for such protection varies from market to market, depending on the extent to which consumers can obtain the information they need to protect themselves, which in turn depends in large part on how competitive the market is. In competitive markets, CFPB can and has adopted the "rotten apple" approach to regulation, finding and penalizing individual lenders or service providers who violate the rules that most of them observe.
But the rotten-apple approach won't work in non-competitive markets where the general rule is that the information consumers need is not provided. An important example is the HECM reverse mortgage market, which may be the most dysfunctional and least competitive of all the major financial service markets. With important exceptions noted below, lenders do not display their prices anywhere, and borrowers do not price shop. Those seniors who go through the process are vulnerable to abuse when the terms of their loan are finally locked. Originators always charge the maximum origination fee allowed by law, regardless of how much they are making on the transaction. Markups are 2.5 to 3 times larger than in the standard mortgage market, though the work load is much the same.
CFPB's approach to this market, consisting of a critique of industry advertising practices, is industry-wide, as it has to be to make sense. CFPB tested advertisements by reverse mortgage lenders with seniors, in focus groups and in one-on-one sessions. It found the following:
Many contained confusing, incomplete, and inaccurate statements regarding borrower requirements, government insurance, and borrower risks...For example, some consumers struggled to understand that reverse mortgages are loans that must be repaid with interest. Consumers also often misinterpreted the role of the federal government in the reverse mortgage market as providing consumer protections that are not actually offered...Similarly, consumers were also confused about ad messages stating that borrowers cannot lose their homes... Advertisements that create the impression that there is no risk can thus be misleading.
I had two reactions to this, one being a "Ho-hum." Of course advertising can be misleading, so what else is new? The universal rule is that advertisers show a best case, not a worst case. Everybody understands that, which is why we don't criticize automobile ads because they don't warn of the dangers of taking turns at too high a speed or running out of gas. Why is CFPB judging the advertisements of reverse mortgage loan providers against an educational standard that is applied nowhere else?
My second reaction, however, was a realization that there was a reason for applying a tougher standard to reverse mortgage ads. The reason is that some seniors make decisions about reverse mortgages based solely on the information they get from advertisements -- because they are not aware of other sources of information that may be more complete and reliable. After their interest has been aroused by an advertisement, they know of no place to go except the source of the ad.
The problem is that the CFPB's broadside against misleading advertising can't accomplish much. The agency has yet to take enforcement action against any firm in the industry. To make any significant impact, CFPB has to attack the root cause of market dysfunction, which is the absence of effective competition.
The good news is that there is a sliver of the HECM market, consisting of a small group of maverick lenders and brokers, that is competitive. They deal with the most astute seniors who learn how to find them. The mavericks post their prices and offer low-cost and in some cases no-cost loans. The challenge to policy makers is to create an environment in which the mavericks become the mainstream.
My colleagues and I can help. We post the prices of mavericks who provide us with their complete pricing structures in our HECM decision engine. Seniors using the decision engine can find the HECM options that best meet their needs, at the same time observing the prices charged by the maverick loan providers. Since many more seniors will use this facility if it is on the CFPB web site, accelerating the transition from maverick to mainstream, we are prepared to license it and service it at no cost to the agency.
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