HUD previously allowed third parties to participate in reverse mortgages in a loosely controlled assistance program, in which they referred borrowers to an FHA-approved lender and further assisted them by providing financial education and advice.

In return, the third party was allowed to negotiate a piece of the origination fee with the FHA-approved lender. Balsis said he's been operating under the assistance program for years, collecting a 1% origination fee in return for his high-touch service.

"We were a go-between, the one really working with the member and helping them understand what's going on," Balsis said. "We were putting that effort out, helping our members, and in return, getting compensated appropriately, I believe."

The new housing bill includes several provisions to guard against opportunities for unscrupulous brokers and lenders to commit fraud. Unfortunately for Ka'u FCU, the assistance program was too ripe with fraud potential, according to lawmakers.

Why not just become an FHA lender? Wooley said the agency has seen an increase in lender applications since the housing bill was announced but was unable to provide exact numbers by press time.

Gaining FHA certification isn't easy, especially for a $13 million institution. The designation requires a detailed application process, significant compliance and reporting responsibilities and additional audits. Wally Welter, president of Reverse Mortgage Lending Inc., a subsidiary of $3.7 billion Wescom Credit Union, said his company spends thousands each year on reporting costs associated with FHA certification.

"For the most part, if you're not going to do a lot of FHA loans, it's not even worth it," Welter said.

Balsis agreed. Ka'u FCU, billed as the southernmost credit union in the U.S., is located on the mostly rural southern tip of Hawaii's big island. Ka'u has a history of serving workers of sugar and macadamia nut plantations, but when many of those jobs left the area, the credit union took on a community development designation.

The credit union's field of membership has some of the worst socio-economic statistics in the country, Balsis said, but the cooperative still manages to serve members well. Ka'u FCU was a 1998-1999 Louise Herring award winner and continues to offer a wide array of services for a credit union its size, including micro-business loans.

However, reverse mortgages will be a thing of the past. Balsis said he only did a few reverse mortgages a year, which don't provide enough income to offset the costs to obtain and maintain FHA approval. It won't have much of an effect on his credit union, he said, but members will ultimately lose out.

"Many of the senior citizens who participate in reverse mortgage programs feel more comfortable, and get things done better, when there is an on-site facilitator, go-between, or whatever you might call us," Balsis said. "They will have to work through others they do not know, and many times by phone, which is impersonal for such a deal."

The credit union manager said he'll continue to refer members to his previous reverse mortgage provider, even though the company is located on the island of Oahu.

"She's not just out to put reverse mortgages on the books and make a buck, she does business humanly, which is the approach we want," he said.

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