Illustration by James Yang.

Attempting to regulate large companies is like trying to dam a large river. You may change the way the water flows, but you’re not going to stop that water from running. When banks were hit with new government regulations in 2010 limiting or eliminating fees they could charge their customers, they hit back. They complied with the rules, sure enough, but they shifted the fees to different transactions. At stake were billions of dollars per year—money the banks were counting on to keep them in the black.

The banks assumed consumers would not notice the new, tiny fees tucked away under vague, misleading headings in monthly statements. Or, if people did notice, banks counted on them to quietly suffer with the new fees, as they usually do.

Boy, were they wrong! The surprising (to them!) breaking point came last fall in the form of a proposal by Bank of America and others to charge $5 per month for the privilege of using their bank-provided debit cards. That fee was shelved after igniting a massive public outcry, the Occupy Wall Street movement, and a well-publicized exodus of big bank customers to the fee-friendlier waters of credit unions and smaller community banks.

But other fees quickly and more quietly took its place—and then some.

Now, lose that debit card and Bank of America charges $5 for a replacement (or $20 if you want rush delivery). Need a teller? Its eBanking enrollees have to pay $8.95 each month they use one to make a transaction. And most recently, the behemoth bank has been testing a menu of new checking account fees as high as $25 a month.

Bank of America is not alone. In 2009, before the Credit Card Accountability Responsibility and Disclosure (CARD) Act ended sudden interest-rate hikes and other money-making “gotchas” on credit card accounts (whose plastic is often issued by big banks), nearly all of the major players offered free checking.

Today, Citibank charges $20 a month unless you keep at least $15,000 in deposits—up from a $6,000 minimum balance in December. At Wells Fargo, expect a $15 monthly charge unless you have at least three accounts, maintain a $7,500 balance, or carry a Wells Fargo mortgage. No matter where you bank, it costs an average of nearly $8 a month in fees for basic (and longtime “free”) checking and ATM use, a 21 percent increase from six years ago. And a checking account isn’t the only service where fee has replaced “free.” Want a paper statement at month’s end or a photocopy of a past transaction? Making a deposit with your mobile phone or receiving one sent by wire transfer? Don’t have, in your bank’s view, enough account “activity” in a given month or need to cash in too many coins? There’s a fee for each at some banks, from 50 cents to a few bucks per use. Meanwhile, fees for longtime services have also increased: Cashier’s checks that used to cost $3 now cost up to four times as much, while money orders have doubled.

Outraged by it all? You’re in good company. In the 90 days following last November 5, the so-called Bank Transfer Day ignited by a 27-year-old art dealer’s Facebook post urging consumers to flee the ever-growing fees of big banks, nearly six million heeded the call—and moved their money to credit unions, which have lower or no fees for many of the same services. (As nonprofits, their tax-exempt status is one reason.) Guess what? There’s a fee for closing a recently opened account: $25 at CitiBank, PNC, U.S. Bank, and Sovereign, and some smaller financial institutions demand up to $50. All told, this nickel-and-diming amounts to some serious coin. Last year, $41 billion in fees alone was generated for America’s financial institutions—including $9.5 billion for “everyday” (and sometimes previously no-cost) services on customers who never overdraw their accounts.

Bigger banks, with higher operating costs, tend to be the biggest offenders. They have an average of 49 different fees, according to a study by Pew Charitable Trusts—ranging from $1.50 for a Xerox page to $175 to drill open a safe deposit box if keys are lost. Many are buried deep in government-mandated “disclosures” statements that now typically run 111 pages long, and are “full of legalese” not easily digested by many customers, says Pew’s Ardie Hollifield.

Overall, fees are fewer and less expensive at smaller banks and credit unions. “You’ll pay roughly one-third fewer fees at a credit union or smaller regional or community as opposed to a mega bank,” says Michael Moebs, CEO of Moebs Services Inc., which conducts independent research about banking services and fees for the financial industry’s federal regulators. “Bigger banks charge higher fees because they have to. There’s a huge cost in having 10,000 braches scattered across the U.S.”

Attack of the Killer Fees The Saturday Evening Post

After Mary Falso paid her mortgage and other bills, there wasn’t much left over from her retirement income. The Goodyear, Arizona, woman found herself declining invitations to travel because she felt she needed to save her money in case the water heater broke.

Then she took out a reverse mortgage and used the proceeds to pay off the $110,000 mortgage on her home.

“With $900 more in my pocket each month, if I want to go somewhere, I go somewhere. I don’t have to worry about a thing,” says Falso, 70. “I was a penny pincher. After getting the reverse mortgage, it’s just like somebody took a ton of bricks off my shoulders.”

During this economic crisis, seniors facing shrinking retirement investments or foreclosure may be exploring reverse mortgages. Reverse mortgages can save some from foreclosure, and they may be a long-term solution for those who struggle to pay bills.

But each individual should explore all financial options in consultation with a HUD-certified credit counselor and a family member or advisor whom they know and trust.

If seniors have a large mortgage and little equity, a reverse mortgage can forestall a foreclosure in the short term, but if they have nothing left over after paying off the mortgage, they may still lose their home, says Jeffrey Taylor, a vice president with Wells Fargo Home Mortgage.

“If you’re going to use the reverse mortgage to pay off debt, you better be sure you have other income to pay taxes and insurance,” he says.

Reverse mortgages, which have been around for 20 years, allow seniors to access their home’s equity while living in their homes. Homeowners 62 and older are eligible for reverse mortgages if the house is their primary residence. Those who take out a federal Department of Housing and Urban Development (HUD)-backed reverse mortgage are required to receive consumer counseling from a HUD-approved counselor: the counseling is usually free or offered for a modest fee.

Borrowers choose to take the cash in a lump sum, as a line of credit, in monthly payments or as a combination of these options. Seniors do not have to pay the loan back until they move out or sell their home.

Those who already have a reverse mortgage needn’t worry about declining real-estate values. The loan amount is based on the home’s appraised value at the time of closing, so even if the home’s value drops below the amount of the loan, seniors can remain in their home, says Denise Hubbard, a reverse mortgage specialist with Mortgage Network, Inc.

“If the home should depreciate in the future, it would only affect how much equity remains when the borrower sells, and this is where the HUD mortgage insurance comes in,” says Hubbard. “It in no way affects any monthly payment they receive or their line of credit.”
Consumer Protections

Late last year, the federal government lowered the fees paid by seniors and raised the amount that seniors can borrow against their houses.

Prior to the change, the maximum allowable loan limit varied by region, with more costly areas such as California having higher borrowing limits than states like Alabama. So borrowers with homes of equal value were allowed different-size mortgages, depending upon where they lived, says Meg Burns, director of the HUD office that oversees reverse mortgages.

The new national limit for a reverse mortgage is $417,000 in the continental United States and $625,500 in Alaska and Hawaii.

The amount of equity that a home-owner is entitled to under the program is calculated based on the home’s value, the lending limit, the senior’s age, and interest rates. If there is a mortgage, outstanding tax bills, or liens on the home, they have to be paid with reverse mortgage proceeds first.

The new law also imposed a $6,000 cap on origination fees. Now, lenders can charge 2 percent for the first $200,000 of loan value and 1 percent of any additional loan value. Consumers are still charged 2 percent for Federal Housing Administration (FHA) insurance. These fees are paid when the home is sold. Lenders are required to disclose all fees in writing.

With traditional mortgages, the origination fee is sometimes charged to consumers in the form of a higher interest rate, so the consumer doesn’t see the full origination fee, Burns says. “There’s a misconception that a reverse mortgage is substantially more expensive than a forward mortgage,” she says.

Reverse mortgage specialists invest more than twice as much time in each customer, she adds.

Denise Hubbard, who has sold reverse mortgages for 15 years, often spends months with a customer who ultimately decides it’s not for them. “It’s a labor-intensive program,” says Hubbard, of Laconia, New Hampshire. “For those who have been in it as long as we have, it is a labor of love.”

But like any occupation, there are a few who tarnish everyone’s image. The new law adds regulations intended to help protect seniors from unscrupulous salespeople.

Historically, some predatory lenders sold seniors other financial products, such as annuities, that they didn’t need. The new law doesn’t fully protect seniors, says Peter H. Bell, president of the National Reverse Mortgage Lenders Association. “It doesn’t stop informal collaboration of two different individuals from two separate companies.”

Cautions Burns, “Never borrow money to invest in something else.”

How It Works

When a senior applies for a reverse mortgage, the first step is education because these mortgages are more complex than traditional mortgages. Seniors’ income and credit scores are not factors in determining whether they can get a reverse mortgage.

Seniors are encouraged to discuss the concept with spouses, adult children, financial advisors, and lawyers, says Bruce McClary, a certified financial specialist with ClearPoint Financial Solutions.

“There are a number of options you should look at before you go into a reverse mortgage,” McClary says. “It should not be done hastily.”

The next step is meeting with a counselor. There, McClary says, the consumer should disclose his or her entire financial picture. A reverse mortgage is considered an option for those facing long-term budgetary strain, but generally not for someone with a short-term need. (However, seniors with terminal illnesses have used reverse mortgages to pay for in-home care so they can die at home.)

Consumers may want to consider liquidating other assets before choosing a reverse mortgage. “It is a last resort,” he says.

On the other hand, says Taylor, from Wells Fargo, with the stock market at record lows, seniors may not want to sell stocks to pay the taxes or fix the roof.

Steve Boland, who directs Bank of America’s reverse mortgage business, says each case is different, and seniors should explore all their options. “Our job is to advise that this definitely isn’t for everyone,” he says.

While more than 90 percent of reverse mortgages are HUD-sponsored, Home Equity Conversion Mortgage (HECM) loans, some are not. HECMs, which are seniors’ safest option, are insured by the Federal Housing Administration (FHA), which is part of HUD.

Seniors are encouraged to shop around for a lender. Reverse mortgage lenders who are members of NRMLA, the trade association, agree to ethics and professional standards, says Bell.

Many of those who get a reverse mortgage are like Mary Falso, who is divorced and has no living children. They have enough in their retirement savings to live on, but they worry that they won’t have enough saved if something goes wrong, so they avoid travel or deny themselves simple pleasures like taking their grandchildren out for ice cream and buying flowers for their yard.

“That’s the nice thing,” she says. “When friends invite her out, now I can say okay.”

When Not to Get a Reverse Mortgage

While each individual’s circumstances are different, experts agree a reverse mortgage is ill-advised if seniors are getting it for the following reasons.

* To loan another person money.
* To start a business or help someone else start a business.
* To invest in the stock market, gamble, or purchase risky financial products.
* When the financial need is short term and temporary.
* When you have other assets that you can liquidate if you need funds.
* If you only plan to stay in the home for three years or less.

Additional Resources

To gain a better understanding of the fundamentals of how reverse mortgages work and to help you decide if the financial option works for you, visit the following websites for more information.

• Go to hud.gov and search for “reverse mortgages” or call 1-800-CALLFHA

• Go to www.nrmla.org, the National Reverse Mortgage Lenders Association

• Go to aarp.org and use their Reverse Mortgage Calculator to help determine how much cash you could get.

Mortgages Going in Reverse The Saturday Evening Post