The U.S. Department of Housing and Urban Development (HUD)’s Office of the Inspector General (OIG) released a fraud bulletin last week that is aimed at keeping the American public informed about common types of scams that pose as legitimate reverse mortgage businesses.

In addition, the bulletin clarifies a number of facts regarding the Federal Housing Administration (FHA)’s Home Equity Conversion Mortgage (HECM) program and offers details about real reverse mortgage loan types — including HECM-to-HECM (H2H) refinances.

Loan complexity, reason for the bulletin

Older Americans are frequent targets of scammers, and in 2021, U.S. financial institutions filed 72,000 suspicious activity reports (SARs) related to elder financial abuse (EFE) — an increase of 10,000 filings year-over-year. The Consumer Financial Protection Bureau (CFPB) estimates that the dollar value of these scams has increased from $2.6 billion in 2019 to $3.4 billion in 2020, the largest increase since 2013, according to recent data.

The OIG bulletin notes that while HECM loans are legitimate products, the targeted HECM demographic makes it easy for scammers to target older Americans and commit EFE by using reverse mortgage pretenses.

The general reverse mortgage loan complexity can also work in scammers’ favor, according to the bulletin.

“Reverse mortgages are complex loans, making them the perfect breeding ground for a scam,” the HUD OIG bulletin states. “A reverse mortgage enables homeowners, age 55 and older, to borrow against the equity in their home. These loans provide additional financial support and typically do not require monthly mortgage payments. Unfortunately, scammers use this type of loan to take advantage of older Americans — stealing their hard-earned money and, in some cases, their homes.”

Common reverse mortgage scams

Topping the list of common reverse mortgage-related scams were “foreclosure scams” — scams in which people at risk of losing their homes to foreclosures are offered an illegitimate reverse mortgage as a way to avoid it. “Equity theft scams,” which are elaborate and can involve a series of illegitimate actors, including unscrupulous appraisers, attorneys and loan officers who conspire together to scam older homeowners, were also common.

“These scammers inflate a home appraisal to deceive homeowners by making them believe they have more equity in their homes than they actually do,” the bulletin states. “Scammers then convince the homeowner to get a reverse mortgage, taking the loan proceeds and leaving the homeowner with little to no equity or cash after closing costs and fees.”

The bulletin notes HECM-to-HECM (H2H) refinancing as a possible scam, despite H2H transactions being authorized under the HECM program.

“At first glance, doing so might seem to make good financial sense; however, a reverse mortgage refinance often leaves the homeowner in a worse financial position, while the lender collects fees,” the bulletin states. “Although a [HECM-to-HECM] refinance is a legitimate [FHA] product, the costs and fees associated with a HECM-to-HECM refinance can be hefty, and the benefit the borrower receives may not always cover the cost of the refinance.”

Bulletin timing and avoiding scams

To help older Americans avoid EFE scams, including those involving reverse mortgages, the OIG offers several recommendations for consumers and their families — including going to trusted experts, like a known financial advisor or a real estate attorney; learning more about reverse mortgage options along with trusted family members; and clearly understanding all the details of the transaction before signing any loan documents.

OIG also recommends doing sufficient research into the lender by visiting its website and social media presence and checking its standing with the Better Business Bureau (BBB).

When asked about why now was an optimal time to release this bulletin publicly, a HUD OIG spokesperson said it’s important to keep the public informed about developments that can target vulnerable populations.

“HUD OIG is always seeking opportunities to raise public awareness about fraudulent activities related to HUD programs to help educate communities about how to protect themselves from becoming victims of these schemes,” the spokesperson told RMD. “This is especially true of fraud schemes that impact those in our most vulnerable communities, such as senior citizens who are unsuspectedly targeted in reverse mortgage fraud. We issued this fraud bulletin as a general reminder about how to recognize reverse mortgage red flags and how to report instances of suspected fraud to our hotline.”

Following the publication of a reverse mortgage HUD OIG bulletin earlier this year, National Reverse Mortgage Lenders Association (NRMLA) President Steve Irwin encouraged industry participants to make use of NRMLA resources available to clients.

“NRMLA is fully supportive of any effort that might mitigate the risk of fraud,” Irwin told RMD in March. “This includes protecting borrowers as well as applicants. We urge our members to share our consumer guides with borrowers and applicants, which can be found at reversemortgage.org, and to work diligently to protect their clients against fraud and abuse throughout the loan’s lifecycle.”

The number of reverse mortgage-related consumer complaints to the Consumer Financial Protection Bureau (CFPB) briefly spiked last year, but appears to have slowed during 2022, according to an analysis of CFPB consumer complaint data this past fall conducted by RMD.