Fannie Mae has followed the Department of Housing and Urban Affairs in trying to clamp down on referral fees for reverse mortgages.

Lenders this week received notice that Fannie Mae would no longer buy reverse mortgages from lenders that have business arrangements with third parties who charge referral fees for the loans.

HUD had tried to enforce the same policy, but a court ruled that the move violated HUD rulemaking procedures. Fannie said it's being a private company lets it refuse to buy the loans.

Reverse mortgages allow older people to withdraw equity from their homes for living expenses. Consumer groups have praised them as a tool for cash- strapped seniors.

But the agencies moved to control referral fees after a investigation by HUD found one adviser was charging seniors up to 10% of their homes' value for reverse-mortgage referrals.

Further investigation into the third party in question, Patriot Inc. of Sacramento, Calif., revealed that its president, Jeffrey G. Butler, had been fined in 1994 by insurance authorities for strong-arm sales tactics on senior citizens.

The widely publicized case highlighted the need for financial services education for the growing population of older Americans, said Jonathan Alpert, an attorney with Tampa-based Alpert, Barker & Calcutt, which has sued six banks it says misled senior citizens while peddling investment products.

The American Association of Retired Persons is pressing for a combination of consumer education; litigation to keep people with histories of fraudulent sales practices out of the market; and data bases listing them.

A National Association of Securities Dealers pilot program to list broker histories on the Internet is a good start, said Laura Polacheck, senior analyst with the association.

Seniors, Mr. Alpert said, are particularly vulnerable to strong-arm sales tactics with financial services products. And the increasing pool of Americans over 65 will make the problem even more acute.

"Demographics will drive destiny," he said. "A lot of people who have lived from paycheck to paycheck for their entire lives for the first time have an asset-either a (mortgage-free) home or their 401(k) plan."

After the Butler investigation early this year, HUD issued a letter calling on lenders to refuse reverse mortgage loans referred by third parties. The letter was rescinded when a federal judge ruled that HUD acted without due process.

HUD is backing a bill that would give it the authority to bypass its rulemaking process in special cases. The Senate has approved the bill, which awaits action by the House.

In the meantime, Fannie's action should effectively shut off reverse- mortgage referrals by third parties.

A lawyer for Mr. Butler said the move will "wreck" the reverse-mortgage market.

"The question really comes down to what are disproportionate fees," said the lawyer, Jed Babbin. "Shouldn't the consumer make that decision? These old people can't even find the information they need to get a reverse mortgage from HUD."

The lawyer acknowledged that his client had paid $5,000 in fines and repaid $23,000 to senior citizens to whom he'd sold health insurance policies. But Mr. Butler agreed to the penalties only to avoid the time and cost of litigation, Mr. Babbin said.

He said Mr. Butler's license to sell health insurance has been reinstated.

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