Predatory lending practices - where dishonest lenders seek to take advantage of vulnerable borrowers - is a very real problem. Predatory mortgage lending is characterized by: excessive interest rates or fees, abusive or unnecessary loan provisions with no benefit to the borrower, large prepayment penalties, and underwriting that ignores the borrower’s ability to repay the loan in question.

The reverse mortgage market is somwhat unique from regular mortgage markets in that it is closely monitored by federal agencies (in particular HUD) and includes strict requirements for counseling that help protect seniors from predatory lending practices. According to HUD:

(S)eniors with considerable equity in their homes can be prime targets for predatory lending. We require that seniors considering a HECM loan receive counseling, and we have worked hard to ensure that the counseling they receive before applying is of high quality.

HUD believes that our frontline of protection against predatory lending is an informed consumer. Housing counseling has proven to be an extremely important activity to educate consumers on how to avoid abusive lending practices. Housing counseling agencies help educate borrowers, so they have the financial literacy they need to protect themselves. Counselors assist individuals with making intelligent decisions, helping unwary borrowers avoid inflated appraisals, unreasonably high interest rates, unaffordable repayment terms, and other conditions with can result in a loss of equity, increased debt, default, and even foreclosure.

During the housing counseling session the senior learns how a HECM works, how much equity he or she would receive through a HECM, how much the transaction will cost, what are the financial alternatives to a HECM and what are the tax and estate consequences, among other things.

But regardless of these protections, predatory lenders remain a serious risk, and seniors considering a reverse mortgage are advised to take into consideration the following points:

- Don’t deal with anyone who offers to find you a reverse mortgage loan originator for a fee.
- Don’t pay anyone to give you information about reverse mortgages. There is an abundance of excellent information freely available;
- Never sign documents with blank spaces that will be “filled in later”.
- Always insist on getting a good faith estimate (GFE)of costs from your loan originator.
- Avoid “estate planning” services who offer to find you a reverse mortgage originator. Some estate planning firms attempt to exact a fee from a borrower simply for referring the borrower to a lender. HUD discourages the use of estate planning services or any other services that charge a fee for referring a borrower to a lender. Counselors must inform the borrower that these services are unnecessary to obtain a HECM loan and are ineligible for payment from HECM proceeds.

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A Few More Related Articles of Interest:

Lessons In Reverse Mortgage Fraud

Reverse Mortgage Pro and Cons

Lending Tree Study Discusses Seniors Attitude Towards Debt and Reverse Mortgages

How the new housing bill affects reverse mortgages.

The DIY Reverse Mortgage