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 2.5-3
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 that:
“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.