The Department of Housing and Urban Development (HUD) has left elderly borrowers vulnerable to abusive lending practices, according to a new study by the Government Accountability Office (GAO). The study raises concerns about the adequacy of consumer protections for reverse mortgage borrowers, who are sometimes subjected to misleading marketing and inappropriate cross-selling of other financial products that may be unsuitable for them.

A reverse mortgage allows homeowners 62 or older to convert the equity in their home to a flexible cash advance that does not have to be repaid until the homeowner moves, sells, or dies. Almost all reverse mortgages are made under the Home Equity Conversion Mortgage (HECM) program, which is administered by HUD. In the first quarter of 2009, HUD backed about $7.8 billion worth of reverse mortgages, the largest amount in any quarter since the agency launched the program.

While reverse mortgages look like no-lose propositions at first glance, they are complex products that have significant downsides for some. For example, reverse mortgage loans carry large insurance and origination costs, they may affect eligibility for government benefits like Medicaid, and they are not ideal for those consumers whose objective is to safeguard an inheritance for their children.

The GAO reviewed marketing materials used by reverse mortgage lenders and found some claims that were “potentially misleading because they were inaccurate, incomplete, or employed questionable sales tactics.”

GAO also found evidence that potentially unsuitable financial products like annuities are being sold in conjunction with reverse mortgages. The Housing and Economic Recovery Act of 2008 is intended to restrict this inappropriate cross-selling, but HUD is still in the early stages of developing regulations.

To help seniors make informed decisions about whether to obtain a reverse mortgage, Congress requires prospective borrowers to obtain adequate counseling by an independent third party. As part of its investigation, the GAO employees went undercover to receive such counseling. While the GAO found that the counselors generally conveyed accurate and useful information, none of the counselors covered all of the topics required by HUD and in nearly half the sessions the counselors did not discuss required information about alternatives to reverse mortgages.

The GAO concluded that these issues pose “emerging consumer protection risks” for reverse mortgage borrowers and the agency makes a number of recommendations to improve consumer protections.

To read the GAO report, “Reverse Mortgages: Product Complexity and Consumer Protection Issues Underscore Need for Improved Controls over Counseling for Borrowers,” click here –  gao-report-on-reverse-mortgages.

Source: ElderLaw Answers