Fighting Fraud Between Family Members Presents Real Challenges

Under duress, even family members may be driven to steal from a senior relative who is receiving reverse mortgage proceeds. “There’s a lot of family fraud” in the reverse mortgage business, says Charles Martinez, a HUD field supervisor for quality assurance.

And, the problem may go unnoticed in some cases for some time, according to Barry McLaughlin, special agent in charge of the Midwest Region of HUD’s Office of Inspector General. “In many cases, when fraud occurs, it could be a year or two down the line before we actually know there’s a problem.”  McLaughlin says HUD is weighing moves that could prevent family fraud from occurring in the future.

“Right now our audit division is looking at a proposal where they may review all the cases where somebody took immediate lump-sum dispersals on a HECM,” says McLaughlin, “because that could be an indication of fraud.”


Meanwhile, Mary Dee Lemaire, vice-president, prime and government policy, Wells Fargo Home Mortgage, reports that the company is likely to set up a new plan to ensure “face-to-face meetings with senior customers,” a necessary step toward warding off “an increase of [fraudulent] incidents.” The increase stems from the fact that “the reverse mortgage has cash-out dispersals,” Lemaire notes, adding: “Identity theft involves relatives in financial stress using reverse mortgages” as a way to [illicitly] get some money.

Perhaps surprisingly, HUD’s Martinez notes that family members not involved in the fraud may be unconcerned. He cites a case, referred to the Illinois Attorney General’s office for investigation, involving two elderly sisters who lived in a “dilapidated” house owned by one of the sisters whose daughter inherited the house when her mother died. “The daughter deeded the house to her aunt who she then convinced to obtain a reverse mortgage. The niece used [the proceeds] to pay off her student loans, fix up her own house and buy a couple cars,” according to Martinez. The fraud was discovered by a HUD monitor who then informed the aunt’s son. “But, he doesn’t want to do anything about it,” Martinez says, adding: “That’s the kind of thing that’s happening out there.”

Written by Neil Morse

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  • >>“Right now our audit division is looking at a proposal where they may review all the cases where somebody took immediate lump-sum dispersals on a HECM,”

    That'd make sense if homeowners were able to decide how they'd like their proceeds distributed, as with the variable programs. But it doesn't make sense anymore, because most homeowners select the fixed program, whereas they're mandated to receive their benefits as a lump sum.

  • At least one face-to-face meeting between borrower and mortgage loan originator should be mandatory on all reverse mortgages. The nonsense that such meetings are nothing more than an old style of selling was irresponsibly promoted by lenders which found such meetings to be outside of their business model and added costs.

    If someone is originating a loan on a home in Philadelphia, PA from Elkhorn, NV, the originator should be required to go to Philly to meet with the prospect at some point during the loan process. This is a simple and reasonable procedure to deter fraud. Who cares what the practice or custom is in the forward mortgage industry or what the cost might be to travel to or from remote areas in the US; that is just the cost of doing business.

    Some may argue that it might deter some fraud but not the most sophisticated. Well, shutting exterior doors and locking them rarely prevents the best thieves from entering a home but the practice certainly deters the majority of such crimes or why lock any doors in high crime areas?

    A little over three years ago it was required that either the counselor or the originator have a face-to-face meeting with a prospective borrower . That requirement was stopped because of alleged inconvenience to a few borrowers. Let’s reinstate that requirement but modify it to say that the originator must meet the borrower at the site of the security or, in the case of a HECM for purchase, at the principal (or in rare cases, the temporary) residence of the borrower.

    • I know many are not going to like this because many seem to believe a face-to-face meeting should be mandatory which is just crazy! Again, our clients should be able to make their own decisions…we should not make them for them! This would be another rule Obama would absolutely love. Making decisions for us as if our seniors can't think or make decisions for themselves.

      We are not FBI investigators. A face-to-face meeting will not stop a family member from taking advantage of their seniors. If they are going to do it they are going to do it period. Family members are involved with the reverse mortgage process all the time. This is not our place to accuse family members of something before they even have the loan. How are we going to prevent fraud from occuring because of a face-to-face meeting? Just keep adding the requirements. Its a slow death of the HECM as the ridiculous additions of requirements continue to add-up.

      • 2545,

        There is no perfect way to stop fraud. There are ways to protect against its occurrence.

        You may be a Certified Fraud Auditor or a fraud expert, but I doubt it. The face-to-face meetings help reduce the incidence of fraud but nothing, absolutely nothing will stop it. Like James points out, FHA is an insurer and has the right to institute procedures it believes will reduce the risk of loss.

        Your observations would be far more valid in a propriety reverse mortgage setting but they are not. While face-to-face meetings will not minimize all forms of fraud it will deter younger men from pretending to be older women as happened not long ago. It will also help reduce the incidence of neighbors creating reverse mortgages for “the senior down the street.”

        The idea behind face-to-face meetings is that many incidences of fraud will have to become collusion in order to succeed. Collusion is more likely to result in much earlier detection and conviction. Collusion is also much harder to manage.

        Are you finally back in the industry full time?

      • Enough with the requirements! Stop before they kill the program…hoop after hoop!

        Not many places to go Critic. Ears always open! I have decided not to go back and be a doctor. Therefore, I will just keep my ears open and play the game…for now : )
        Have a good weekend!

  • Almost all HECM borrowers are currently taking lump-sum dispersals. I think you are creating another problem that does not exist by setting up future reviews. I can't imagine reviewing the spending habits of borrowers who received lump sum payments to try and uncover family fraud. There will be many people who are unhappy with what they did with the money and who they spent it on and I'm sure many false accusations as well. What if the borrower doesn't remember they told a niece she could buy a new car? What if they are now under medical or psychiatric care? What if the children advised their parents to use a reverse mortgage to pay off an existing financial burden and the parents later change their minds and want to prosecute them? I think borrowers should be held accountable, at any age, for what happens to their assets.

    Where were all of these mortgage police when my customers, who are now seniors, went to one of the big banks and got a six figure, equity line without even having an appraisal on the property? Why didn't anyone question the use of proceeds or bat an eye at all of the theft that happened within those households? I am talking to a customer in Scottsdale, AZ right now, who needs a loan to replace a $300,000, 401k that was liquidated and spent by her daughter. So we see this all of the time, it is not unique to our industry and it does not warrant another layer of regulation and oversight of reverse mortgages.

    • Thank you Mr.Manfried…”I think borrowers should be held accountable, at any age, for what happens to their assets”. The Nanny State has failed the country and shouldn't be expanded in the mortgage indursty.

    • Mr. Manfredi,

      I absolutely agree that none of the problems are unique to our industry. But your comment reflects nothing about the position of HUD through FHA in the HECM process.

      As an insurer it is prudent and imperative for FHA to look into what can be done to limit its exposure to loss. If one area of risk is the potential inappropriate actions by family members, the OIG should investigate such matters to see what can be done to mitigate losses from this source.

      Our problem is too many times we confuse HUD, the regulator, with HUD, the insurer. HUD is not looking into the reverse mortgage industry; its efforts in this regard are restricted to HECMs.

      If a senior does not want government intrusion, they should be warned about getting a government insured loan. While the actions of HUD may be more intrusive than other insurance companies, HUD is also safeguarding not just its insurance pool but also the U.S. Treasury.

  • rainmand,

    Forcing someone to take a large lump-sum who has little experience with managing significant amounts of cash is inviting disaster. That is why a line of credit is generally to be preferred when it comes to HECM borrowers.

    Auditing now is a brilliant idea. The population of fixed rate HECMs is small and limited but large enough to sample and reach relevant conclusions about the population as a whole and perhaps even trends. Our opinions in the industry are far too subjective and biased and thus are unreliable from a statistical point of view. Having an independent and competent assessment of the impact of the lump-sum requirement on recipients is valuable to the industry no matter what the findings.

    Holding no illusions that the results will be viewed uniformly by all, it is important that the industry obtain independently derived findings now so that we are armed to head off criticism which will no doubt arise over time due to the inappropriate use of lump-sum payouts by some. Speaking with some senior advocates, this is already a topic of concern which is being discussed in what is believed to be an over reactionary manner.

    Some in the industry have turned a blind eye to this situation; however, most of us are concerned about recipient use of the cash they receive. Here is hoping that the auditors will review the results with the industry before publishing their findings.

  • Interesting the example of the aunt and the niece. They deemed it fraud, yet had they used a HECM purchase mortgage, the same result would have occured..niece gets the money, aunt gets the house to live in.

    • Mr. Hamilton,

      I do not believe the niece selling a partial interest in a home to the aunt who is an existing tenant-in-common living in the home which is her principal residence would ever qualify as a HECM for purchase. To qualify the transaction must involve the acquistion of a new principal residence (ML 2009-11) by the borrower.

      But there is no reason why the transaction could not have been set up as a sale unless it was designed to be a gift between family members that has some real estate tax implications. Remember not all purchases of interests in a home qualify as a HECM for purchase but that does not mean the proceeds cannot be used to acquire additional real property interests in a home that already qualifies as a principal residence of the borrower. I successfully did a similar transaction the year before we had HECMs for purchase.

      Please correct this position if it is in error.

  • Senior Protective Services needs to step up nationally and intercede on behalf of those seniors who are being mentally abused by their heirs and children. Greed is quietly ravaging thousands of seniors who deserve better but are unwilling or able to stand against their own families.

  • Forcing someone to take a large lump sum is wrong on every level, legally, ethically & morally. And it should be dealt with as such. I could not agree more with you Mr. Veale!

    And to the Critic, the significance of making the decision on securing a reverse mortgage, or not, demands a face to face meeting. This is certainly not an “old style of selling” it’s the proper style of selling when any decision that affects the client’s life is being made. You are 100% correct!

    Setting up some sort of future “quality control survey” to learn how to better serve and protect our seniors is one thing. But trying to police or audit what is happening inside their family is quite another…

    Should we all be endeavoring to make sure the senior who is securing the reverse mortgage is not being taken advantage of? Yes, of course! But intruding into their family lives and the personal problems and drama that exists in most families is way over the line…even in the guise of “protecting the senior.”

    To those of you that are all for this I ask you; Will banks be doing this same “audit” for anyone above the age of 62 when they apply for a conforming cash out refinance or a standard credit line?

    Soon we will have HECM counselors giving tests to our seniors and now this…

    Protecting seniors and scaring seniors are 2 totally different subjects and this one crosses that line.

    Be careful everyone…

    • Mr. Banner,

      I always enjoy reading your comments.

      Did you have a good birthday celebration? I hope you fully enjoyed your time. I also hope you remembered two great American Presidents on that day, John Adams and Thomas Jefferson who both died on that same day of the year within hours of one another. What an interesting point in history that one died believing the country was a better place because of the other despite their significant political differences.

      I absolutely agree with you and The_Critic on the point about originators needing to meet in person with borrowers. Why some have attempted to relegate the value of in person meetings to “old school” and why the industry allowed that to happen was as astounding then as it is now. The 80% to 20% approval in Costa Mesa and 50% to 50% tie in Atlanta still alarms me.

      On the issue of whether or not HUD should review HECMs for potential family fraud, as I attempted to write in my comment to Mr. Manfredi, HUD must do this because it does not just regulate reverse mortgages, it also insures HECMs. As an insurer and protector of the U.S. Treasury, it should look into these matters since it must mitigate potential losses to the HECM pool no matter what the source.

      Investigating is not only prudent, it is imperative. Some are assuming what the result will be. I prefer to give the OIG the time needed to investigate and make its recommendations before condemning HUD's actions in this regard.

  • Critic: When I started in the insurance business (there were only agents, no financial planners/advisers, etc.). We were called field underwriters and took applications in person and attested to the entries. We were supposed to evaluate the applicants physical (so someone 300 pounds could not put down he was 210) and mental (no one pointing a gun to his head) state to a certain extent. There were plenty of crooked agents, even back then, but at least it was a fairly good system. I think anyone with the potential to get a big lump of money is like ants attracted to honey; plenty of relatives are tempted, not just outside crooks. I don't know what the solution is, but I have always favored an income stream to a bank account and automated payments for insurance, taxes and utilities to minimize financial stress and to make the client a less desirable target. We should also look at some form of teleconference type counseling and interviewing.

    • As usual, I respect your opinion and involvement on this website. I have found many of your comments insightful and helpful. HOWEVER, I have missed seeing them lately. I look forward to your increased participation now and in the future; I hope all is well with you and yours. I enjoy reading what you write.

      • Computer virus/crash and new computer setup time plus sundry mundane tasks (including various continuing education: insurance and securities and annual compliance meeting) diverted me from drinking too many espressos and monitoring your industry. Hopefully my days need not be filled any more with endless (and fruitless) hours talking to India and Caribbean call centers.
        Thanks, Critic.

  • Let us be real about fraud,”if some one wants to rip you off,they will find a way”.Yes fraud prevention can work some of the time,however crime has been going on for centuries,you can't be a guardian angel for everyone.Senior citizens are prayed upon by not only criminal elements,(67%) sixty seven percent of senior crimes are done by family members.I serve on the Clark County Vulnerable Adult Task Force doing seminars on financial crimes.

    • Mr. Frankel,

      Please forgive my humor, but I doubt if many criminals pray for the victims they have prey upon even when they are family members.

      Rather than repeating my replies to Mr. Banner and Mr. Manfredi, I will just reference it.

      I believe there is a clear distinction between the HUD regulator and HUD the insurer. If this were merely the actions of a regulator, I would be very bothered but since these actions seem to stem from its position as an insurer, these actions seem right, proper, and reasonable.

  • I totally agree that the originator should meet with the senior borrower, in their home. This would provide a heads up of some fraud issues and give the senior borrower a real opportunity to understand the reverse mortgage. Of course, the originator needs to be trained and they should be licensed or certified specifically for reverse mortgage origination. If we want to be professional, our originator's need more training and to be tested on their knowledge and ethics. At this point the counselors must meet more requirements and have more reverse mortgage training than the originators.

  • According to the Michael Stolworthy, Assistant Special Agent in Charge, Office of the Inspector General, HUD, DC office, at the 11/09 NRMLA Convention, All fixed rate HECMs are being inspected already for possible fraud. This is apparently ongoing.

    As with Michael Manfredi, many of the senior borrowers I have done reverse mortgages for in the last three years especially have gotten into trouble with a line of credit or a mortgage which they got in order to buy cars, pay for down payments for homes, pay off credit card bills, etc., for their children or grandchildren. This is not a problem of merely the reverse mortgage industry, this is a mortgage industry wide problem. The only reason we are targeted is because we serve only the older population. If loans made industry wide by the mortgage industry to older borrowers were examined, I believe they indicate the same problems. We live in interesting times, as the Chinese say. I agree with Wells, the Critic, and PW. Face to face is the only way to go. In addition, as PW says, the originators need licensing not just registration and a relevant certification program. Face to Face may be the only way to protect ourselves as originators from being involved in fraud cases involving family.

  • Computer virus/crash and new computer setup time plus sundry mundane tasks (including various continuing education: insurance and securities and annual compliance meeting) diverted me from drinking too many espressos and monitoring your industry. Hopefully my days need not be filled any more with endless (and fruitless) hours talking to India and Caribbean call centers.nThanks, Critic.

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