Let’s face it; in a free society, the government (in this case, the FHA) can’t arbitrarily outlaw reverse mortgages because of a few bad apple lenders steering unsuspecting borrowers towards reverse mortgages even when not suitable. What the FHA can do, however, is increase the transparency of the process and the flow of information to potential borrowers, so that they can make informed decisions about the appropriateness of the product. Towards this end, the FHA is in the process of overhauling the system of reverse mortgage counseling.

It is already the case that every borrower must first complete a mandatory information session with an FHA-approved counselor. The problem was that many of these counselors were either disingenuous, uninformed, or downright dishonest. [Apparently, the FHA learned this the hard way through some undercover detective work, where counselors posing as potential borrowers discovered gaping holes in the counseling process]. The “problem” is that counseling is available either free of charge or at very low cost, which means that unscrupulous counselors must find another way to get paid. In many cases, counselors have provided referrals to reverse mortgage lenders, in exchange for a commission. While this is dishonest enough, perhaps it is worse that recommending a reverse mortgage lender carries the implicit belief that the reverse mortgage itself should be recommended.

The reformed counseling program, then will begin with a paring down of the list of approved counselors, so that these shills for the reverse mortgage industry can be weeded out. Those that remain on the list will then be required to pass an examination, demonstrating competent understanding of reverse mortgages. Furthermore, the protocol for the counseling session will be enhanced, and there will be a required list of items that must be covered. Opponents of reverse mortgages will be relieved to learn that one of these items is a summary of the alternatives to reverse mortgages. The counseling session will conclude with a brief “quiz” of potential borrowers. If the borrower can demonstrate a thorough understanding, then he will be presented with a certificate, which is necessary to obtain a reverse mortgage.

One of the potential downsides of the new FHA requirements is that they allow counseling sessions to be completed over the phone, where there is a possibility for misunderstanding and even impersonation by third parties which may wish to steer the borrower towards a reverse mortgage. While this could certainly increase convenience, it also could lead to abuse.

As a potential borrower, it is recommended that you complete the counseling session before you begin shopping for a reverse mortgage. The counseling session will not only provide insight into what you can expect from the application process and the types of questions you should ask, but also a list of approved lenders. To find an FHA-approved counselor, click here.