RM SUITS

Last month a Kentucky company settled claims that its reverse mortgage program amounted to financial exploitation of the elderly. Commonwealth Life Insurance Company, a subsidiary of Providian Corporation of Louisville, Kentucky, agreed to a $5 million settlement in the lawsuit, which had been filed in San Mateo County, California. 

The Commonwealth case began as a San Mateo Public Guardian investigation. The public agency found that Beatrice Mathews, then in her 70s, had been talked in to obtaining a reverse mortgage and had quickly incurred over $35,000 in advances, fees and commissions. The Public Guardian was appointed to manage her estate, and brought the lawsuit. 

San Mateo County promises it will pursue other reverse mortgage companies. A lawsuit has already been filed against Transamerica Corporation, alleging that its reverse mortgages amount to elder abuse. 




In addition, reverse mortgages have complex contract terms that are confusing and can greatly impact the overall cost of a reverse mortgage to the borrower. This report examines the effect of some of these terms on some California reverse mortgage borrowers and looks at the danger to borrowers when lenders or third parties involved in arranging reverse mortgages do not fully disclose a loan's terms and fees. One example involves a lawsuit filed by the San Mateo County Public Guardian which, on behalf of Berta Grey, an 83-year old woman, alleged that Transamerica Corporation unfairly and unconscionably charged her what was in effect a shared appreciation fee. This fee gave Transamerica an automatic 50% interest in the difference between the base value of the home when the loan was signed and the appreciated value of the home when the loan terminated, even though the fee bore no relation to the amount she actually borrowed. Additionally, the cost of Berta Grey's reverse mortgage soared when she was required to purchase an annuity in conjunction with her reverse mortgage. An annuity is an insurance product financed out of the home's equity to provide monthly payments to the borrower immediately or after a certain number of years. The San Mateo County Public Guardian alleged that Transamerica charged Berta Gray the cost of the annuity immediately and that interest began compounding on that fee even though she was not due to receive any payment on the annuity until six years after the loan began, at age 89. Under this arrangement, if Ms. Gray died before the six-year period ended, her estate would see no benefit from the annuity purchase, although she had paid in full for it.




Numerous other front-end and back-end fees can quickly drive up the cost of a reverse mortgage and are discussed in more detail in this report. These fees include origination fees, points, mortgage insurance premiums, closing costs, servicing fees, shared equity or "maturity" fees, and shared appreciation fees. The case of the San Mateo County Public Guardian v. Commonwealth Life Insurance illustrates how some of these fees generated allegations by a class of 1,505 borrowers that they were charged tens of thousands of dollars in artificially inflated loan fees. This suit was settled in 1999.