BILL NUMBER: AB 329 INTRODUCED
BILL TEXT
INTRODUCED BY Assembly Member Feuer
FEBRUARY 18, 2009
An act to amend Sections 1923.2 and 1923.5 of, and to add Chapter
9 (commencing with Section 1924) to Title 4 of Part 4 of Division 3
of, the Civil Code, relating to reverse mortgages.
LEGISLATIVE COUNSEL'S DIGEST
AB 329, as introduced, Feuer. Reverse mortgages.
Existing law defines and regulates reverse mortgage loans and
provides a disclosure notice that a lender must provide an applicant,
which informs the applicant that a reverse mortgage is a complex
financial arrangement and advises the applicant of the wisdom of
seeking financial counseling before entering the agreement. Existing
law requires a lender to refer a prospective borrower to a housing
counseling agency for counseling, as specified, prior to accepting a
final and complete application for a reverse mortgage or assessing
any fees.
This bill would enact the Reverse Mortgage Elder Protection Act of
2009. The bill would prohibit a lender from referring a prospective
borrower to a counseling agency, or paying any counseling service
fees without first informing the prospective borrower in writing that
this may create a conflict of interest. The bill would require a
lender to disclose to the prospective borrower in writing any other
payment arrangements or business affiliations between the lender and
a counseling agency. The bill would require the lender to provide the
prospective borrower with a list of all nonprofit counseling
agencies in the state that have been approved by the United States
Department of Housing and Urban Development for counseling. The bill
would grant borrowers the right to cancel a reverse mortgage within
30 days for any reason and would require a lender to provide a notice
to this effect.
The bill would also provide that any person who offers, sells, or
arranges the sale of a reverse mortgage to an elder, as defined,
owes to that elder a fiduciary duty, including the duty to act in the
best interest of the elder, with the utmost care, honesty and
undivided loyalty, diligence, and good faith toward the elder. The
bill would provide a list of criteria for a court to consider when
determining if the duty has been breached. The bill would provide
that a person who breaches this fiduciary duty is liable to the
borrower for any damages proximately caused by the breach of
fiduciary duty, and would provide a prevailing plaintiff attorney's
fees and court costs.
Vote: majority. Appropriation: no. Fiscal committee: no.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. This act shall be known as the Reverse Mortgage Elder
Protection Act of 2009.
SEC. 2. The Legislature finds and declares the following:
(a) A reverse mortgage is a loan that allows a homeowner to
convert home equity into tax-free cash payments. More than 90 percent
of all reverse mortgages are obtained through the Home Equity
Conversion Mortgage (HECM) program sponsored by the United States
Department of Housing and Urban Development. Many senior citizens use
reverse mortgage payments to supplement retirement income or pay
medical expenses. Although the HECM program has been in existence
since 1989, the program has seen rapid growth only in the past few
years. As the population ages, this growth rate is expected to
accelerate. The growth rate is also expected to increase as sales
agents and lenders turn from the declining subprime and conventional
mortgage market to the rapidly growing market for reverse mortgages.
(b) According to the American Association of Retired Persons
(AARP) and other senior citizen groups, reverse mortgages are often a
valuable financial tool for senior citizens who are "equity rich but
cash poor." However, senior groups also note that the rapid
expansion of reverse mortgages has been accompanied by aggressive
marketing and reports of abuse, especially when reverse mortgages are
marketed along with annuities, long-term life insurance, or other
financial investment products. Because reverse mortgages erode equity
in what is typically the primary asset of most senior citizens, the
AARP recommends that senior citizens should weigh all alternatives
before considering a reverse mortgage. The AARP strongly advises
against using the proceeds of a reverse mortgage for the purchase of
annuities or other financial investments, since the high cost of
obtaining a reverse mortgage often exceeds any likely returns.
(c) As a number of recent lawsuits and media reports in California
make clear, the inappropriate marketing of reverse mortgages and
ancillary financial products to senior citizens is growing, often
creating substantial loss in personal estates and home equity.
Existing law currently provides little recourse for senior citizens
who ill-advisedly, and without full understanding, purchased an
otherwise legitimate product. In enacting the Reverse Mortgage Elder
Protection Act of 2009, it is not the intent of the Legislature to
discourage the use of reverse mortgages, which often provide
substantial benefits to senior citizens. Rather, anticipating the
continued rapid growth in the reverse mortgage market, the Reverse
Mortgage Elder Protection Act of 2009 seeks to ensure that senior
citizens will make informed decisions and that persons who offer,
sell, or arrange the sale of reverse mortgages to senior citizens
will act in the best interest of a sometimes vulnerable population.
SEC. 3. Section 1923.2 of the Civil Code is amended to read:
1923.2. A reverse mortgage loan shall comply with all of the
following requirements:
(a) Prepayment, in whole or in part, shall be permitted without
penalty at any time during the term of the reverse mortgage loan. For
the purposes of this section, penalty does not include any fees,
payments, or other charges that would have otherwise been due upon
the reverse mortgage being due and payable.
(b) A reverse mortgage loan may provide for a fixed or adjustable
interest rate or combination thereof, including compound interest,
and may also provide for interest that is contingent on the value of
the property upon execution of the loan or at maturity, or on changes
in value between closing and maturity.
(c) A reverse mortgage may include costs and fees that are charged
by the lender, or the lender's designee, originator, or servicer,
including costs and fees charged upon execution of the loan, on a
periodic basis, or upon maturity.
(d) If a reverse mortgage loan provides for periodic advances to a
borrower, these advances shall not be reduced in amount or number
based on any adjustment in the interest rate.
(e) A lender who fails to make loan advances as required in the
loan documents, and fails to cure an actual default after notice as
specified in the loan documents, shall forfeit to the borrower treble
the amount wrongfully withheld plus interest at the legal rate.
(f) The reverse mortgage loan may become due and payable upon the
occurrence of any one of the following events:
(1) The home securing the loan is sold or title to the home is
otherwise transferred.
(2) All borrowers cease occupying the home as a principal
residence, except as provided in subdivision (h).
(3) Any fixed maturity date agreed to by the lender and the
borrower occurs.
(4) An event occurs which is specified in the loan documents and
which jeopardizes the lender's security.
(g) Repayment of the reverse mortgage loan shall be subject to the
following additional conditions:
(1) Temporary absences from the home not exceeding 60 consecutive
days shall not cause the mortgage to become due and payable.
(2) Extended absences from the home exceeding 60 consecutive days,
but less than one year, shall not cause the mortgage to become due
and payable if the borrower has taken prior action which secures and
protects the home in a manner satisfactory to the lender, as
specified in the loan documents.
(3) The lender's right to collect reverse mortgage loan proceeds
shall be subject to the applicable statute of limitations for written
loan contracts. Notwithstanding any other provision of law, the
statute of limitations shall commence on the date that the reverse
mortgage loan becomes due and payable as provided in the loan
agreement.
(4) The lender shall prominently disclose in the loan agreement
any interest rate or other fees to be charged during the period that
commences on the date that the reverse mortgage loan becomes due and
payable, and that ends when repayment in full is made.
(h) The first page of any deed of trust securing a reverse
mortgage loan shall contain the following statement in 10-point
boldface type: "This deed of trust secures a reverse mortgage loan."
(i) A lender shall not require an applicant for a reverse mortgage
to purchase an annuity as a condition of obtaining a reverse
mortgage loan. A reverse mortgage lender or a broker arranging a
reverse mortgage loan shall not:
(1) Offer an annuity to the borrower prior to the closing of the
reverse mortgage or before the expiration of the right of the
borrower to rescind the reverse mortgage agreement.
(2) Refer the borrower to anyone for the purchase of an annuity
prior to the closing of the reverse mortgage or before the expiration
of the right of the borrower to rescind the reverse mortgage
agreement.
(j) (1) Prior to accepting a final and
complete application for a reverse mortgage loan or assessing any
fees, a lender shall refer provide the
prospective borrower to a housing counseling agency
with a list of all nonprofit counseling agencies in
the state that have been approved by the United States
Department of Housing and Urban Development for counseling. The
counseling shall meet the standards and requirements established by
the United States Department of Housing and Urban Development for
reverse mortgage counseling. The lender shall provide the
borrower with a list of at least five housing counseling agencies
approved by the United States Department of Housing and Urban
Development, including at least two agencies that can provide
counseling by telephone.
(2) A lender shall not refer a prospective borrower to a
counseling agency. The lender shall not pay any counseling service
fees without first informing the prospective borrower in writing that
this may create a conflict of interest. A lender shall disclose to
the prospective borrower in writing any other payment arrangements or
business affiliations between the lender and a counseling agency.
(k) A lender shall not accept a final and complete application for
a reverse mortgage loan from a prospective applicant or assess any
fees upon a prospective applicant without first receiving a
certification from the applicant or the applicant's authorized
representative that the applicant has received counseling from an
agency as described in subdivision (j). The certification shall be
signed by the borrower and the agency counselor, and shall include
the date of the counseling and the name, address, and telephone
number of both the counselor and the borrower. Electronic facsimile
copy of the housing counseling certification satisfies the
requirements of this subdivision. The lender shall maintain the
certification in an accurate, reproducible, and accessible format for
the term of the reverse mortgage.
(l) A lender shall not make a reverse mortgage loan without first
complying with, or in the case of brokered loans ensuring compliance
with, the requirements of Section 1632, if applicable.
(m) The borrower may rescind any reverse mortgage within 30 days
of execution by providing written notice to the lender. Any payments
received in connection with the reverse mortgage shall be returned
within 15 days of rescission.
SEC. 4. Section 1923.5 of the Civil Code is amended to read:
1923.5. No reverse mortgage loan application shall be taken by a
lender unless the loan applicant has received from the lender the
following plain language statement in conspicuous 16-point type or
larger, advising the prospective borrower about counseling prior to
obtaining the reverse mortgage loan:
IMPORTANT NOTICE
TO REVERSE MORTGAGE LOAN APPLICANT
A REVERSE MORTGAGE IS A COMPLEX FINANCIAL TRANSACTION THAT PROVIDES A
MEANS OF USING THE EQUITY YOU HAVE BUILT UP IN YOUR HOME, OR THE
VALUE OF YOUR HOME, AS A SOURCE OF ADDITIONAL INCOME. IF YOU DECIDE
TO OBTAIN A REVERSE MORTGAGE LOAN, YOU WILL SIGN BINDING LEGAL
DOCUMENTS THAT WILL HAVE IMPORTANT LEGAL AND FINANCIAL IMPLICATIONS
FOR YOU AND YOUR ESTATE. IT IS THEREFORE IMPORTANT TO UNDERSTAND THE
TERMS OF THE REVERSE MORTGAGE AND ITS EFFECT. BEFORE ENTERING INTO
THIS TRANSACTION, YOU ARE REQUIRED TO CONSULT WITH AN INDEPENDENT
LOAN COUNSELOR. A LIST OF APPROVED COUNSELORS WILL BE PROVIDED TO YOU
BY THE LENDER. YOU MAY ALSO WANT TO DISCUSS YOUR DECISION WITH
FAMILY MEMBERS OR OTHERS ON WHOM YOU RELY FOR FINANCIAL ADVICE.
YOU ARE ENTITLED TO RESCIND (CANCEL) THIS REVERSE MORTGAGE
TRANSACTION FOR ANY REASON WITHIN 30 DAYS FROM THE DAY YOU EXECUTE
THE REVERSE MORTGAGE DOCUMENTS. THE RESCISSION MUST BE IN WRITING AND
SENT BY CERTIFIED MAIL TO THE LENDER AT THE LENDER'S PLACE OF
BUSINESS.
SEC. 5. Chapter 9 (commencing with Section 1924) is added to Title
4 of Part 4 of Division 3 of the Civil Code, to read:
CHAPTER 9. REVERSE MORTGAGE LENDER DUTIES TO ELDERS
1924. (a) In addition to any other obligation under law, any
person who offers, sells, or arranges the sale of a reverse mortgage,
as defined Section 1923, to an elder, owes to that elder a fiduciary
duty, including the duty to act in the best interest of the elder,
with the utmost care, honesty and undivided loyalty, diligence, and
good faith toward the elder, as well as the duty of timely and clear
disclosure of all material information that might reasonably affect
the elder's rights or interests or the elder's ability to receive the
intended benefit of the transaction.
(b) In determining whether a person has breached the fiduciary
duty described in subdivision (a), the court shall evaluate whether
the person considered, and discussed with the borrower, the
following:
(1) The age and life expectancy of the prospective borrower and
how this would impact the total annual loan cost.
(2) The extent to which the prospective borrower's financial needs
would be better met by options other than a reverse mortgage,
including, but not limited to, less costly home equity lines of
credit, property tax deferral programs, or governmental aid programs.
(3) Whether the borrower intends to use the proceeds of the
reverse mortgage to purchase annuities or other financial products
and the suitability of using reverse mortgage proceeds to purchase
the annuity or other financial products.
(4) Whether a person or entity other than the lender recommended
the reverse mortgage for the purpose of purchasing an annuity or
other financial product.
(5) Whether the lender complied with all requirements of existing
state and federal law and industry standards.
(6) Any other factor that the court determines relevant in light
of the totality of the circumstances.
(c) In addition to any other civil remedies provided by the law, a
person who breaches the fiduciary duty described in subdivision (a)
shall be liable to the borrower for any damages proximately caused by
the breach of fiduciary duty. A prevailing plaintiff shall also be
entitled to attorney's fees and court costs.
(d) For purposes of this chapter, "elder" means any person 65
years of age or older.