Reverse Mortgage Scams and Consumer Protections

Scam Patterns Your Family Should Recognize

The Consumer Financial Protection Bureau lists contractor scams and scams targeting veterans among the reverse mortgage schemes it warns about on its reverse mortgage guidance page. Several patterns tend to repeat.

Home-repair pitches. A contractor suggests a reverse mortgage to pay for repairs and steers the homeowner to a particular lender. The work may be overpriced, unfinished, or paid for out of loan proceeds the contractor controls.

Foreclosure "rescue." Someone offers to save a home from foreclosure if the homeowner takes out a reverse mortgage and signs over the proceeds or the title to the rescuer.

Deed theft and equity stripping. A person persuades the homeowner to sign papers that transfer ownership of the house. The papers are sometimes presented as loan documents.

Investment pitches. Loan proceeds are pushed into a financial product that the salesperson profits from. The Federal Trade Commission's reverse mortgage page warns that some salespeople pressure borrowers to buy annuities or long-term care insurance, and that buying them could mean losing the money from the reverse mortgage.

False government ties. A caller poses as a counselor or claims a federal agency backs a specific company. The CFPB notes that the Department of Veterans Affairs offers no reverse mortgage loans, and that some ads falsely imply VA approval or offer a "no-payment" reverse mortgage.

Recognizing a pattern by name makes it easier to pause and ask questions before anything is signed.

Federal Consumer Protections That Apply to Reverse Mortgages

What separates a real federally insured reverse mortgage from a pitch is a set of rules written into federal law. The insured program is the Home Equity Conversion Mortgage, or HECM. HUD's HECM program page says it is the only reverse mortgage insured by the federal government, available only through a lender approved by the Federal Housing Administration (FHA). The youngest borrower must be 62 or older at closing under 24 C.F.R. § 206.33.

A HECM is still a loan. The CFPB explains that interest and fees are added to the balance each month, so the amount owed grows and home equity, the value of the home minus what is owed on it, shrinks. The borrower must live in the home as a principal residence, pay property taxes and homeowners insurance, and keep the house in good condition. The loan comes due when the last surviving borrower dies, sells the home, or no longer lives there as a principal residence; for an Eligible Non-Borrowing Spouse, HUD's rules defer the due date that the last borrower's death would otherwise set. The detailed due-and-payable events appear in 24 C.F.R. § 206.27.

The statute, 12 U.S.C. § 1715z-20, adds protections a scam pitch lacks:

• Independent counseling. Before a HECM, the borrower must receive counseling from a third party not associated with or paid by anyone originating, servicing or funding the loan, or selling annuities, investments, insurance or other financial products. That rule appears in 12 U.S.C. § 1715z-20(d)(2)(B). Under subsection (f), the counselor covers topics including options other than a HECM, the financial implications, and a disclosure that the loan may have tax consequences, may affect eligibility for federal and state programs, and may affect the estate and heirs.
• Full cost disclosure. The borrower must receive full disclosure of all costs, showing which charges are required to obtain the loan and which are not.
• Disclosures before closing. At least 10 days before closing, the lender must give a statement explaining that the borrower's liability is limited. The statement also covers rights about temporary absences, late payments, lender default and all conditions that make the loan due. A projected total cost statement is also required before closing.
• Non-recourse. "Non-recourse" means the debt is limited to the home. Under subsection (d)(7), the homeowner is not liable for the difference between the loan balance and what the lender recovers from the net sale proceeds of the home or from FHA insurance benefits.
• No forced add-on products. Under subsection (o), no one may require the borrower to buy insurance, an annuity or a similar product as a condition of eligibility. Customary products such as title, hazard and flood insurance are the exception.

The CFPB also describes a right of rescission, a right to cancel, that comes with most reverse mortgages. Within three business days after closing, the borrower can cancel for any reason, without penalty, by notifying the lender in writing. After cancellation, the lender has 20 days to return money paid for the financing.

Red Flags to Watch For Before Signing Anything

A warning sign is usually a behavior, not a document. These are the patterns that line up against the protections above.

A rush. An offer that "expires today," or a push to sign before anyone else can look.

Money up front. A request for fees before any loan closes, often paid to the person making the pitch rather than through a lender's disclosed closing costs.

An unprompted reverse mortgage. A contractor, salesperson or stranger who raises a reverse mortgage as the fix for a repair, a debt or an investment.

Unread papers. Documents left blank, signed quickly, or not explained in words the homeowner understands.

Borrowed federal authority. Claims that HUD, FHA or another agency approves a particular company's product. In the HECM program, the federal role is insuring loans that FHA-approved lenders make.

Isolation. Anyone who discourages talking to a family member, an attorney or an independent counselor.

"I'll handle counseling for you." Under 12 U.S.C. § 1715z-20(d)(2)(B), the counselor must be independent of the people originating or funding the loan. A salesperson who offers to take care of counseling does not fit that rule.

A required purchase. A loan presented as conditional on buying an annuity or another investment. The FTC notes that in some situations insisting on this is illegal.

How to Report Reverse Mortgage Fraud

When a family suspects something is wrong, the next question is usually who to call. Several offices take reports, and each handles a different piece.

Federal Trade Commission. The FTC takes consumer fraud reports through its ReportFraud.ftc.gov reporting site and publishes the reverse mortgage guidance cited above.

Consumer Financial Protection Bureau. The CFPB accepts complaints about mortgages, including reverse mortgages, and publishes consumer guidance on how they work and how to spot scams.

HUD Office of Inspector General. HUD's Office of Inspector General investigates fraud involving HUD programs, which include the FHA-insured HECM.

The state attorney general. A state attorney general's office can receive complaints about fraud aimed at residents of that state.

Adult Protective Services. Where an older adult may be the target of financial exploitation, the local Adult Protective Services office is a resource.

Reporting creates a written record and helps agencies see patterns across many complaints. It does not promise any particular result for one household. A homeowner who has already signed papers and believes a cancellation right may apply after the three-day window can seek legal help, as the CFPB suggests.

Making a report, even when the outcome is uncertain, puts a record in place and may protect someone else in the same situation.

What a Real Reverse Mortgage Process Looks Like

A real HECM has a recognizable order, and that order is itself a protection. The CFPB's guidance on questions to ask a counselor describes counseling from a HUD-approved agency as required for a HECM. The counselor can give unbiased information about the loan under consideration. HUD lists a counselor roster and a phone line, (800) 569-4287, on its program page.

From there, the homeowner applies with an FHA-approved lender. The lender provides the required disclosures before closing, and the homeowner has time to read them and ask questions. Nobody in a legitimate process pushes the borrower to skip counseling or hurry to the closing table. For a fuller walk-through, see how a reverse mortgage works.

The obligations stay the same throughout the loan. The balance grows as interest and charges are added, and the home must remain the principal residence. The CFPB's repayment guidance adds that the loan may come due sooner if taxes or insurance go unpaid or the home is not kept in repair. Ongoing property taxes and insurance matter for that reason.

A reverse mortgage is not the right fit for every situation. Other paths each trade something different. A home equity loan or line of credit usually has monthly payments and depends on income and credit. A cash-out refinance replaces the current mortgage with a larger one. Property tax relief programs can lower costs. Downsizing turns equity into cash by selling, and help from family can carry a household through a gap. The CFPB's caution guide lists several of these alternatives. A side-by-side look at a reverse mortgage versus home equity loan shows how two of them differ.