The explosion in reverse mortgage lending has been accompanied by a proportional rise in unsavory activity. Smelling opportunity, scam artists have come out of the woodwork to perpetrate fraud, under the guise of selling reverse mortgages. As a (potential) reverse mortgage borrower, there are a few scams in particular that you should be on the lookout for, and a set of commonsense practices that you can follow to avoid becoming a victim.

Perhaps the most popular type of fraud involves overcharging borrowers. While ordinarily this would not be illegal (albeit dishonest), there are specific limits that apply to reverse mortgages. Depending on the size of the reverse mortgage, the fee should never exceed 5% (including a 2% origination fee, 2% insurance premium, and assorted other closing costs). If you are being charged more, there is a strong possibility that you are being deceived. The best way to protect yourself from being ripped off is simply to shop around. If a lender can see that you are comparing rates and scrutinizing prices, naturally he will be less likely to charge an extortionate price.

Skirting pre-loan counseling, the second type of fraud, is actually more of a prelude to fraud. Many lenders will downplay the importance of pre-loan counseling, even going so far as to recommend that borrowers skip it altogether. This constitutes outright fraud, since counseling by a certified organization is a legal prerequisite to receiving a reverse mortgage. The counseling session cannot be carried out by the lender itself, and phone counseling sessions are discouraged. If your lender tries to skirt the counseling session, there is a strong possibility that they have something to hide, and that he is trying to set you up to be defrauded. On a related note, such counseling is available free of charge. If your lender tries to exhort even one cent from the counseling session, you should consider him unscrupulous and try to find a new lender. If you have any doubts about the qualifications of your counselor (or even if you don’t), it wouldn’t hurt to select one from the List of FHA-Approved Counselors.

Then there is a category of scams which are blatantly dishonest, but sometimes difficult to discern. For example, there have been cases of middlemen and title agents that lied about maximum loan sizes, and pocketed the difference. Other instances involve these same dubious characters pocketing funds that borrowers have designated to pay down existing mortgage debt. Unfortunately, this type of fraud is very easy to perpetrate, since borrowers understand in advance that the bulk of the proceeds from the reverse mortgage will not be given to them, but rather to their primary mortgage lender. The best way to avoid becoming the victim of such forgery/theft is to choose a reputable lender, and to double-check with all parties to make sure that the correct dollar amounts of been transferred to the appropriate parties (including you, the borrower) upon completion of the reverse mortgage.

Other cases involve “false impersonation” that stems from the public misperception that reverse mortgages are directly arranged by the government. While the vast majority of reverse mortgages are indeed insured by the FHA (or Fannie/Freddie), they don’t play a role in the origination of mortgages. In short, don’t be fooled by a lender that claims to be working on behalf of the government.

The final category of scams is conducted with the complicity of the borrower. Under so-called “flipping” arrangements, “speculators purchase distressed properties and, with the aid of cosmetic repairs and inflated appraisals, deed them to seniors at above-market prices. Seniors—some of whom may be part of the scheme—typically are promised homes for no money down. In return, they secure a reverse mortgage and divert some, if not all, of the proceeds to the scheme’s promoters.” The best ways to avoid becoming ensnared in such a scheme is a) only secure a reverse mortgage on a property you already own, and b) seek (reverse mortgage) financing through a third-party lender, rather than through your agent, in the event that it is being for a new home.

Let’s face it: seniors make easy targets. The FBI agrees, noting that seniors are preyed upon because of the perception that they are trusting, naive, unwilling to report fraud, and have stable financial situations. For that reason, the FBI urges seniors to bear in mind the following when shopping for a reverse mortgage:

• Do not respond to unsolicited advertisements.
• Be suspicious of anyone claiming that you can own a home with no down payment.
• Do not sign anything that you do not fully understand.
• Do not accept payment from individuals for a home you did not purchase.
• Seek out your own reverse mortgage counselor.