Fraud with Reverse Mortgages
Toppling Reverse Mortgage Abuse with a California Financial Elder Abuse Attorney
With substantial numbers of Baby Boomers now reaching or exceeding retirement age, the reverse mortgage industry has become a booming business. These types of financial instruments offer a number of advantages to those who qualify for them in that they allow the borrower to extract equity from the home without having to make monthly payments. However, reverse mortgages are not for everyone, and in some cases can do more harm than good. If you or someone you love has suffered financial harm as a result of a reverse mortgage, please contact a California financial elder abuse attorney.
Please note that our law firm only accepts reverse mortgage claims when the borrower lacked capacity and/or the mortgage was sold with annuities or other form of unsuitable insurance product. If you’re unsure if your claim fulfills this criteria, we encourage you to explain your claim via our contact form.
What Is a Reverse Mortgage?
A reverse mortgage is a type of home equity line of credit that allows the borrower to access the equity in their home in the form of cash payments and to defer repaying the loan until they die, sell their house, or move out of it. They are known as “reverse” mortgages because, rather than the borrower making payments to the lender, the lender makes one or more payments to the borrower. The proceeds of a reverse mortgage can be paid to the homeowner in the form of a lump sum, monthly payments, a line of credit, or some combination of all three.
Reverse mortgages are available to borrowers who:
- Are 62 years of age or older
- Live in the mortgaged home as their primary residence
- Have substantial equity in the home
Homeowners who are considering a reverse mortgage must also complete a federally-mandated counseling session that requires lenders to disclose, among other things, “a good faith estimate of the projected total cost of the mortgage to the consumer expressed as a table of annual interest rates.”
Reverse Mortgage Abuse is Financial Elder Abuse
Because reverse mortgages are available only to borrowers aged 62 years and older, they are frequent instruments of financial elder abuse. This is a form of elder abuse that involves taking advantage of seniors in a way that causes financial harm to them. It can be accomplished through a variety of means, but, according to the California Elder Abuse and Dependent Adult Civil Protection Act, an individual commits financial elder abuse when he or she:
- Takes, secrets, appropriates, obtains, or retains real or personal property for a wrongful use or with an intent to defraud (or both)
- Assists in taking, secreting, appropriating, obtaining, or retaining real or personal property for a wrongful use or with an intent to defraud (or both).
- Takes, secrets, appropriates, obtains, or retains, or assists therein, real or personal property by undue influence (i.e., excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will, resulting in inequity)
California courts interpret the terms “taking,” “property,” and “wrongful use” very broadly. For the purposes of reverses mortgage abuse, “property” should be understood to include all expenses incurred in a reverse mortgage transaction, including application fees, appraisal fees, origination fees, counseling costs, recording fees, mortgage insurance premiums, closing costs, taxes, and interest payments. Thus, reverse mortgage fraud and abuse sit squarely within the realm of financial elder abuse.
How Do Lenders Engage in Reverse Mortgage Abuse?
The federally-mandated counseling sessions that all potential borrowers must undergo help to cut down on reverse mortgage abuse, but they have a number of limitations. Because federal funding for these programs has been scaled back, some borrowers fail to go through counseling at all, while others receive only the most basic of counseling that fails to adequately advise the borrower. Many lenders also allow the costs of these sessions to be paid out of the proceeds of the reverse mortgage, which creates a perverse incentive for the lender to overstate the benefits of reverse mortgages.
Unscrupulous reverse mortgage lenders take advantage of borrowers several other ways, as outlined below.
Preying on California Seniors Suffering from Limited Mental Capacity
Individuals over the age of 62 are at a significantly increased risk of suffering from dementia, Alzheimer’s, or other mental disorders that can compromise their ability to make rational, well-informed decisions about their finances. Lenders who are eager to make a sale can easily take advantage of these borrowers’ diminished capacity and force them into signing financial instruments that they do not (and cannot) understand. This form of reverse mortgage abuse can be particularly devastating, as it can often force individuals suffering from dementia and other mental disorders into homelessness should the lender foreclose.
Selling Annuities with the Proceeds of Reverse Mortgages
Another common form of reverse mortgage fraud can occur when a lender convinces the borrower to purchase an annuity (such as an insurance product) with the proceeds of the reverse mortgage. This has the effect of tying up those proceeds and penalizes the borrower if they need to access them to pay for health care costs or other emergencies. Purchasing annuities with the proceeds of a reverse mortgage can also end up costing the borrower much more in the long run, such as when the interest earned by the annuity is less than the interest charged by the reverse mortgage. For example, a borrower who purchases a deferred annuity that earns 3% interest with the proceeds of a reverse mortgage that charges 4.5% interest will be in a worse position than a borrower who retained the proceeds of the reverse mortgage.
Vendor and Contractor Fraud
Using the proceeds of a reverse mortgage for home improvement purposes is a very common occurrence. In some cases, however, unscrupulous home improvement vendors and contractors target the elderly by attempting to sell them their services. When the target expresses concern about the costs, the vendor or contractor will pressure them into obtaining a reverse mortgage to pay for the repairs with no regard to whether a reverse mortgage will actually benefit them. For seniors wishing to make home improvements, a home equity line of credit or a traditional second mortgage may be a better option.
Flipping fraud occurs when dishonest real estate agents target seniors with promises to find them a new, lower-cost home that they can purchase without having to put any money down. They will then pressure them into obtaining a special type of reverse mortgage called a Home Equity Conversion Mortgage for Purchase, which allows the borrower to purchase a new principal residence with the proceeds of the reverse mortgage. This may work out well for some borrowers but, unfortunately, many of these new “lower-cost” are lower-cost because they are in poor condition. Unscrupulous real estate agents also frequently will find a way to divert a portion of the proceeds from the reverse mortgage to themselves.
False or Misleading Advertising
Reverse mortgage lenders have a long and sordid history of engaging in false or misleading advertising. The Consumer Financial Protection Bureau even went so far as to order three reverse mortgage companies to cease running ads in 2016, assessing them almost $800,000 in fines. Some of the most common false claims that reverse mortgage lenders advertise include:
- The homeowner will always retain ownership
- The homeowner cannot be forced to leave
- There are no costs to obtain a reverse mortgage
These companies also frequently recruit well-known actors to put a reassuring face on the dubious claims they are making, including Henry Winkler, Robert Wagner and Tom Selleck.
Let a California Financial Elder Abuse Attorney Help You With Your Legal Claims for Reverse Mortgage Abuse
Seniors who have been the subject of reverse mortgage fraud or abuse are not without recourse, as there are a variety of statutory and common law claims available to them.
Statutory Financial Elder Abuse Claims
Many states have laws that protect seniors from financial elder abuse, but each state defines that term differently and any particular state’s definition may or may not encompass reverse mortgage abuse. As discussed above, California’s financial elder abuse statute is comparatively aggressive, and California courts interpret its terms very broadly to include reverse mortgage abuse. Where the borrower can prove by clear and convincing evidence that the reverse mortgage lender is liable for financial abuse, he or she is entitled to recover compensatory damages as well as attorney’s fees and costs.
California law also allows a judge or jury to award treble (triple) damages to victims of financial elder abuse when that abuse involves unfair or deceptive practices or unfair methods of competition. This can occur, for example, in situations where a reverse mortgage lender sells the borrower a high-risk or otherwise financially inadvisable annuity with the proceeds of the reverse mortgage. When evaluating whether to award enhanced damages, the courts consider:
- Whether the defendant knew or should have known that his or her conduct was directed to a senior citizen,
- Whether the defendant’s conduct caused a senior citizen to suffer loss of their residence, employment, source of income, payments under a retirement plan or government benefits program, or assets essential to the health or welfare of the senior citizen, and
- Whether the senior citizen was substantially more vulnerable to the defendant’s conduct than other members of the public due to the senior citizen’s age, poor health, or impaired understanding
A reverse mortgage is a contract and, as such, is governed by the common law rules applicable to all contracts. One of the most basic legal requirements of a valid contract is that the parties to it must possess legal capacity. Generally, this means that the parties are of legal age and are mentally capable of understanding the terms of the contract, as well as their rights and responsibilities under it. A contract is void (i.e., invalid and unenforceable) if it can be shown that one or more of the parties lacked capacity at the time he or she entered into it.
Proving incapacity can often be tricky for plaintiffs, as the law presumes that the parties to a contract have the capacity to enter into it. However, that presumption is rebuttable by presenting evidence that the plaintiff suffers limited capacity, which can include:
- Lack of awareness of time, place, or situation
- Inability to understand or communicate with others
- Inability to attend and concentrate
- Short- and long-term memory loss
- Failure to recognize familiar objects and persons
- Inability to understand and appreciate quantities
- Inability to plan, organize, and carry out actions in one’s own rational self-interest
- Severely disorganized thinking
- Uncontrollable, repetitive, or intrusive thoughts
These types of claims are particularly applicable in cases where a lender sells a reverse mortgage to a client whom he or she knows suffers from dementia or another mental incapacity.
Even in the absence of diminished legal capacity, reverse mortgage lenders can be held liable through common law negligence claims. Evidence of negligence in the reverse mortgage process can include missed steps, insufficient disclosures, or incorrect timing. Any of those occurrences can indicate negligence, negligent training, or negligent supervision. To succeed on a negligence claim, the plaintiff must show (1) a duty of care on the part of the lender, (2) a breach of that duty by the lender, (3) the lender’s breach was the cause of the borrower’s damages, and (4) the borrower suffered actual damages. Of these elements, the lender’s duty of care is often the most challenging to prove, as money lenders typically owe their clients a very low duty of care absent a showing that the lender also acted as a financial advisor or other fiduciary.
Reverse mortgage abuse also frequently involves fraud, such as when reverse mortgage lenders intentionally lie about the benefits of reverse mortgages or make inflated claims in advertisements that are too good to be true. To succeed on a claim of fraud, the plaintiff must show (1) a misrepresentation, (2) knowledge of falsity, (3) intent to defraud, (4) reliance by the plaintiff, and (4) resulting damage. Fraud claims can often be very difficult to prove, as evidence that the lender actually intended to harm the borrower financially can be hard to find.
Recover from Reverse Mortgage Abuse With Help from a Financial Elder Abuse Attorney
Reverse mortgage fraud and abuse can take a devastating financial toll on seniors. If you or someone you love was sold a reverse mortgage while suffering dementia or was sold an annuity with the proceeds of a reverse mortgage, contact a financial elder abuse attorney at Evans Law Firm by calling 415-441-8669.