BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 329 (Feuer) Hearing Date: June 17, 2009
As Amended May 27, 2009
Fiscal: No
Urgency: No
SUMMARY Would enact the Reverse Mortgage Elder Protection Act
of 2009, as specified.
DIGEST
Existing federal law and regulations
1. Define a reverse mortgage as a nonrecourse consumer credit
obligation in which a mortgage, deed of trust, or equivalent
consensual security interest securing one or more advances is
created in the consumer's principal dwelling, and any principal,
interest, or shared appreciation or equity is due and payable
(other than in the case of default) only after the consumer
dies, the dwelling is transferred, or the consumer ceases to
occupy the swelling as a principal dwelling (Truth in Lending
Act, 12 CFR 226.33);
2. Require a creditor who issues a reverse mortgage to provide
specified disclosures to the borrower, informing the borrower
that he or she is not obligated to complete the reverse mortgage
transaction merely because he or she has received the
disclosures required by federal law or has signed an application
for a reverse mortgage loan; providing the borrower with a
good-faith projection of the total cost of the credit to him or
her, as specified; and itemizing pertinent information about the
loan, including the loan terms, charges, the age of the youngest
borrower, and the appraised property value (12 CFR 226.33);
3. Provide consumers with a three-day right to rescind a consumer
credit transaction, other than a residential mortgage, in which
a security interest is or will be retained or acquired in a
consumer's principal dwelling, as specified (12 CFR 226.23);
4. Establish, within the United States Department of Housing and
AB 329 (Feuer), Page 2
Urban Development (HUD), the Home Equity Conversion Mortgage
(HECM) program to provide federal insurance for reverse
mortgages that meet HUD requirements. Make the HECM loan
available to persons 62 years of age and older and provides that
the loans, made against home equity, shall not come due until
the borrower(s) dies, moves out of the home permanently, or
sells the home. Provide, however, that loan may become due
earlier if the borrower(s) fails to pay property taxes or to
maintain the home, as specified in the loan agreement. Provide
that at the time the loan comes due, the property shall be sold
to retire the loan amount with any residue returning to the
estate or heirs of the borrower. Require any prospective heir
to satisfy the lender's lien before taking title to the property
(12 USC Section 1715z-20 et seq.; 12 CFR Section 226.33);
5. Require that all applicants for an insured HECM loan receive
adequate counseling from an independent third party that is not,
either directly or indirectly, associated with or compensated by
the lender, loan originator, or loan servicer, or by any party
associated with the sale of annuities, investments, long-term
care insurance, or any other type of financial or insurance
product. Require the lender, at the time of initial contact, to
provide the borrower with a list of approved HUD counseling
agencies (12 USC Section 1715z-20; 24 CFR 206.41);
6. Require all HECM loan counselors to be approved by HUD and
meet HUD standards, as specified. Further require the Secretary
of HUD to develop uniform counseling protocols by July 30, 2009,
which must require a qualified counselor to discuss, generally,
financial options other than a reverse mortgage, the financial
implications of reverse mortgages, including any tax
consequences, or the affect of the loan on eligibility for
government assistance programs (12 USC 1715z-20; 24 CFR Section
214.103);
7. Prohibit the lender or any person involved in the
origination of the HECM from participating in, being associated
with, or employing any party that participates in the sale of
other financial or insurance products, unless the lender or
originator maintains firewalls and other safeguards designed to
ensure that individuals participating in the origination of the
HECM loan shall have no involvement with, or incentive to
provide the borrower with, any other financial or insurance
product. Specify that a prospective borrower shall never be
required to purchase any other financial or insurance product as
a condition of obtaining a reverse mortgage (12 USC 1715z-20).
AB 329 (Feuer), Page 3
Existing law
1. Defines a reverse mortgage as a nonrecourse loan secured by
real property, which meets all of the following criteria (Civil
Code Section 1923):
a. The loan provides cash advances to a borrower based on
the equity or value in a borrower's owner-occupied principal
residence;
b. The loan requires no payment of principal or interest
until the entire loan becomes due and payable;
c. The loan is made by a lender licensed or chartered
pursuant to California or federal law.
2. Specifies several conditions which must be satisfied by lenders
who make reverse mortgage loans, and several prohibitions that
apply to those lenders, and includes among those rules, the
following (Civil Code Section 1923.2):
a. Before a lender may accept a final and complete
application for a reverse mortgage loan or assess any fees,
that lender must:
i. Refer the prospective borrower to a housing
counseling agency approved by the United States
Department of Housing and Urban Development (HUD);
ii. Provide the borrower with a list of at least
five housing counseling agencies approved by HUD,
including at least two agencies that can provide
counseling by telephone; and
iii. Receive a certification from the applicant or
the applicant's authorized representative that the
applicant has received counseling from a HUD-approved
counseling agency. The counseling is required to meet
the standards and requirements established by HUD for
reverse mortgage counseling. The certification must be
signed by the borrower and the agency counselor, and
must include the date of counseling, and the name,
address, and telephone numbers of both the counselor and
the borrower.
AB 329 (Feuer), Page 4
b. No lender may make a reverse mortgage loan without first
complying with, or in the case of brokered loans, ensuring
compliance with, the requirements of Civil Code Section 1632,
relating to the translation of loan documents;
3. Prohibits a reverse mortgage lender from requiring an applicant
for a reverse mortgage to purchase an annuity as a condition of
obtaining a reverse mortgage loan, and provides that a reverse
mortgage lender or broker arranging a reverse mortgage loan may
not offer an annuity to the borrower or refer the borrower to
anyone for the purchase of an annuity, before closing the
reverse mortgage, or before the borrower's right to rescind the
mortgage contract has expired (Civil Code Section 1923.2);
4. Provides that, to the extent that the following rules do not
conflict with federal law and result in the loss of federal
funding, reverse mortgage loan payments made to a borrower must
be treated as proceeds from a loan, and not as income, for the
purpose of determining eligibility and benefits under
means-tested programs of aid to individuals, as specified (Civil
Code Section 1923.9);
5. Requires financial institutions, as defined, and their officers
and employees, from January 1, 2007 until January 1, 2013, to
report suspected financial abuse of an elder or dependent adult,
as defined, and makes failure to report suspected financial
abuse a violation of the law, subject to a civil penalty up to
$1,000 ($5,000 if failure to report is willful), paid by the
financial institution to the party bringing the action (Welfare
and Institutions Code Section 15630.1).
This bill
1. Would prohibit any person who participates in the
origination of a reverse mortgage from requiring an
applicant for that mortgage to purchase an annuity as a
condition of obtaining the reverse mortgage loan;
2. Would prohibit a lender or any other person that
participates in the origination of a reverse mortgage from
doing either of the following:
a. Participating in, being associated with, or
employing any party that participates in or is associated
with any other financial or insurance activity, unless
the lender maintains procedural safeguards designed to
AB 329 (Feuer), Page 5
ensure that individuals participating in the origination
of the mortgage have no involvement with, or incentive
to, provide the prospective borrower with any other
financial or insurance product;
b. Referring the borrower to anyone for the purchase of
an annuity or other financial or insurance product prior
to closing the reverse mortgage or before the expiration
of the borrower's right to rescind the reverse mortgage
agreement;
3. Would increase the number of HUD-certified counseling
agencies that must be provided by a reverse mortgage lender
to a prospective borrower from five to at least ten;
4. Would prohibit any HUD-certified housing counseling agency
that counsels a prospective reverse mortgage borrower from
receiving any compensation, either directly or indirectly,
from the lender or from any other person or entity involved
in originating or servicing the mortgage or the sale of
annuities, investments, long-term care insurance, or any
other type of financial insurance product, but would clarify
that this prohibition does not extend to financial
assistance provided by a lender as part of its charitable or
philanthropic activities and which is unrelated to the
offering or selling of a reverse mortgage loan;
5. Would revise the notice that must be provided by a reverse
mortgage lender to a prospective borrower before the lender
takes a loan application from that borrower, by adding the
following language, and would require that the notice be
given to the prospective borrower before that borrower
receives counseling: SENIOR CITIZEN ADVOCACY GROUPS ADVISE
AGAINST USING THE PROCEEDSOF A REVERSE MORTGAGE TO PURCHASE
AN ANNUITY OR RELATED FINANCIAL PRODUCTS. IF YOU ARE
CONSIDERING USING YOUR PROCEEDS FOR THIS PURPOSE, YOU SHOULD
DISCUSS THE FINANCIAL IMPLICATIONS OF DOING SO WITH YOUR
COUNSELOR AND FAMILY MEMBERS;
6. Would further provide that, in addition to the notice
described above, no lender may take a reverse mortgage loan
application from a prospective borrower unless the lender
provides that prospective borrower, prior to his or her
meeting with a counseling agency, with a written checklist.
If the prospective borrower seeks counseling before
requesting a reverse mortgage loan application from a
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lender, the bill would require the counseling agency to
provide the written checklist to the prospective borrower.
The checklist must conspicuously alert the prospective
borrower, in 12-point type or larger, that he or she should
discuss the following issues with the counselor:
a. How unexpected medical or other events that
may require the prospective borrower to move out of
the home earlier than anticipated, either permanently
or for more than one year, may impact the total annual
loan cost of the mortgage;
b. The extent to which the prospective borrower's
financial needs would be better met by options other
than a reverse mortgage, such as a less costly home
equity line of credit, property tax deferral program,
or governmental aid program;
c. Whether the prospective borrower intends to
use the proceeds of the reverse mortgage to purchase
an annuity or other insurance product, and the
consequences of doing so;
d. The effect of repayment of the loan on
nonborrowing residents, after all borrowers have died
or permanently left the home;
e. The prospective borrower's ability to finance
routine or catastrophic home repairs, especially if
maintenance is a factor that may determine when the
mortgage becomes payable; and,
f. The impact the reverse mortgage may have on
the prospective borrower's tax obligations,
eligibility for government assistance programs, and
the effect that losing equity in the home will have on
the borrower's estate and heirs.
COMMENTS
1. Purpose of the bill To protect seniors from obtaining
reverse mortgages that are unsuitable for them, and, in
doing so, to help seniors avoid the devastating effects of
an unsuitable reverse mortgage loan.
2. Background A reverse mortgage is a home loan that allows
AB 329 (Feuer), Page 7
a senior homeowner, 62 years of age or older, to convert a
portion of the equity in his or her home into cash payments.
The senior is not required to pay back the loan during
their lifetime, unless they no longer use the home as their
principal residence. The loan is due when the senior sells
his or her home, no longer uses it as his or her primary
residence, or dies. The vast majority of reverse mortgages
sold to seniors at the present time are Home Equity
Conversion Mortgages (HECMs), insured by the Federal Housing
Administration (FHA), and governed by federal law and
regulations specific to HECMs.
There are, however, rules which apply to all reverse
mortgages, not just HECMs. As noted above under the
"existing law" discussion, Truth in Lending Act rules, which
generally require consumer disclosures, apply to all reverse
mortgages, regardless of whether they are made by
federally-regulated or state-regulated lenders, and
regardless of whether the mortgage is FHA-insured.
California's law also applies to all reverse mortgages,
whether or not the mortgage is FHA-insured; however, federal
pre-emption issues cloud the question of whether
California's reverse mortgage law applies to reverse
mortgages made by federally-regulated lenders.
Representatives of federally-regulated lenders have informed
Committee staff that their clients are following California
reverse mortgage law at the present time. They are not
willing to speculate about whether federally-regulated
lenders would continue to follow California reverse mortgage
law, if it were changed in a way that imposed significant
legal liability on them. Thus, this bill would clearly
apply to reverse mortgages originated by state-regulated
lenders, regardless of whether those mortgages are
FHA-insured. It is probable (given their neutrality on this
bill), but less certain, that federally-regulated reverse
mortgage lenders would comply with the provisions of this
bill.
The federal HECM law was amended in 2008 and 2009, to better
protect seniors who contemplate engaging in HECM reverse
mortgage transactions. This bill adds several of those
federal provisions to California law. It also goes beyond
federal law by requiring the provision of a specified
checklist to prospective borrowers, for their use when
discussing the potential ramifications of a reverse mortgage
AB 329 (Feuer), Page 8
with a HUD-certified housing counselor.
In background material provided to this Committee by the
author's office, the author notes that reverse mortgages are
becoming increasingly popular in the United States.
According to a recent article in the Wall Street Journal
("Reverse Mortgage: Get Cash, But Use Caution," by Anne
Tergesen), the number of federally insured, reverse
mortgages grew from 43,082 in 2005 to 112,015 in 2008. One
of the reasons for their popularity is tied to the declining
stock market. Some seniors are looking for cash and do not
wish to draw down already depleted investment accounts.
According to a reverse mortgage broker quoted in that WSJ
article, "We're seeing more people use reverse mortgages to
give their portfolios time to more fully recover."
While reverse mortgages can provide seniors with cash they
might not otherwise have, have access to, or wish to access,
they, like all investments, carry risks. Borrowers who draw
down their home equity and lack other sources of income can
find themselves without the resources they need in their
later years, especially if they can no longer live on their
own, and require in-home or facility-based care.
3. Reverse Mortgages 101 As noted immediately above, the
vast majority of reverse mortgages originated at the present
time are so-called HECM mortgages. Under HECM rules, the
amount a borrower may borrower depends on his or her age,
the interest rate of the loan, the appraised value of the
borrower's home, and the FHA mortgage limits in the
borrower's area (which recently increased, pursuant to
enactment of the American Recovery and Reinvestment Act of
2009 (Public Law 111-5). Generally speaking, the more
valuable one's home is, the more the equity the borrower
holds in that home, the older one is, and the lower the
interest rate on the loan, the more a senior can borrow
through a reverse mortgage. According to FHA, "based on a
loan with interest rates of approximately 9%, and a home
qualifying for $100,000, a 65-year-old could borrower up to
34% of the home's value; a 75-year-old could borrow up to
47% of the home's value; and, an 85-year-old could borrow up
to 64% of the home's value. These percentages do not
include closing costs because these charges vary."
To be eligible for a HECM, FHA requires that the borrower be a
homeowner, 62 years of age or older, own the home or have a
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mortgage balance low enough that it can be paid off at
closing with proceeds from the reverse mortgage loan, live
in the home, and receive consumer information from a
HUD-approved counseling agency before obtaining the loan.
There are no asset or income limitations on eligibility.
FHA refers interested borrowers to the Housing Counseling
Clearinghouse, at 1-800-569-4287, to obtain the name and
telephone number of an approved counseling agency and a list
of FHA-approved lenders in the borrower's area.
A variety of homes are eligible, including single-family
dwellings, 2- to 4-unit dwellings in which the borrower owns
and occupies one of the units, townhouses, detached homes,
units in FHA-approved condominiums, and manufactured homes
built on or after June 1976, which have permanent
foundations. FHA has another program, called the Spot Loan
program, which can help a senior whose condominium does not
qualify for a HECM.
With HECMs, borrowers have five options regarding the way(s)
in which they may receive their reverse mortgage payments,
including: 1) tenure - which consists of equal monthly
payments, paid for as long as one borrower lives and
continues to occupy the property as his or her principal
residence; 2) term - equal monthly payments for a fixed
number of months selected; 3) line of credit -- unscheduled
payments, made in installments or at times and amounts of
the borrower's choosing, until the line of credit is
exhausted; 4) modified tenure - a combination of line of
credit and monthly payments for as long as the borrower
remains in the home; and 5) modified term - a combination of
line of credit and monthly payments for a fixed period of
months of the senior's choosing.
HECM borrowers may choose either a fixed interest rate or an
adjustable interest rate at origination. If they choose an
adjustable interest rate, they may choose to have that
interest rate adjust monthly or annually. There is no
interest rate cap on a monthly adjustable rate. Annually
adjustable rates are capped at increasing by no more than 2
percentage points per year, and by no more than 5 percentage
points over the life of the loan. Because reverse mortgage
borrowers receive money, rather than paying it, the interest
rate on these types of loans works in reverse, compared to
the way in which it works on "regular" types of mortgage
loans. In the case of a reverse mortgage, the higher the
AB 329 (Feuer), Page 10
interest rate, the less money the borrower receives.
When a senior borrower sells his home or no longer uses it as
their primary residence, the senior or his or her estate
must repay the cash received from the reverse mortgage, plus
interest and other fees, to the lender. The remaining
equity in the home, if any, belongs to the borrower or his
or her heirs. None of a borrower's other assets are
affected by the FHA-insured reverse mortgage.
HECM loans also include several fees, including an origination
fee, closing costs, mortgage insurance premiums, interest,
and servicing fees.
A HECM loan must be repaid in full when the borrower dies or
sells the home. The loan also becomes due and payable in
any of the following circumstances: 1) the borrower does
not pay property taxes or hazard insurance; 2) the borrower
permanently moves to a new principal residence; 3) the
borrower fails to live in the home for 12 consecutive months
(as could occur if the borrower had a nursing home stay of
12 months or longer); or 4) the borrower allows the property
to deteriorate, and does not make necessary repairs.
4. Support The California Association of Nursing Home Reform
(CAHNR), one of the two co-sponsors of the bill, believes
that AB 329 offers a reasonable approach to protect seniors
from becoming involved with unsuitable reverse mortgage
loans that may have devastating financial consequences for
them. CAHNR believes that reverse mortgages have a place in
our economic society, but these types of loans should be
used judiciously.
If used injudiciously, CAHNR observes that reverse mortgages
can have devastating consequences. The organization offers
three worst-case scenarios that can befall seniors who
obtain reverse mortgages that are unsuitable for them: 1)
Seniors who have exhausted their equity through reverse
mortgage loans will be deprived of the opportunity to move
into assisted living facilities; 2) Seniors who imprudently
waste their home equity through frivolous or nonessential
undertakings will, in the future, find themselves stranded
in their homes and unable to maintain necessary expenditures
after exhausting their equity; and 3) Seniors will face a
life of destitution if they fall prey to financial scammers
who connive to get them to pull out home equity in order to
AB 329 (Feuer), Page 11
fund financial adventures.
AARP California believes that, in general, reverse mortgages
should be used as a last resort for most consumers. While
acknowledging that reverse mortgages can be a useful safety
net for many Californians who have no other financial
resources and want to continue living independently, AARP's
own studies have found that many older Americans have been
pressured into obtaining mortgages they don't need, and
which deplete the equity in their greatest single asset.
AARP California believes that AB 329 will help protect those
homeowners who may be considering a reverse mortgage by
ensuring that they get a fair product which meets their
needs.
Other elder advocacy groups, including the California Alliance
for Retired Americans (a co-sponsor), Aging Services of
California, California Commission on Aging, California
Senior Legislature, Congress of California Seniors, and the
AAA Advisory Council, as well as the Center for Responsible
Lending, Consumer Attorneys of California, Trusts and
Estates Section of the California State Bar, and
Professional Fiduciary Association of California are also
supportive of the bill for similar reasons.
5. Opposition None received.
6. Prior and Related Legislation
a. SB 660 (Wolk), 2009-10 Legislative Session:
Would provide that any lender, broker, person, or
entity who recommends the purchase of a reverse
mortgage in anticipation of financial gain owes the
prospective borrower a duty of honesty, good faith,
and fair dealing, and would require the provision of a
checklist, similar to the one required by this bill,
to a senior, before that senior obtains reverse
mortgage counseling.
b. SB 1609 (Simitian), Chapter 202, Statutes of
2006: Prohibited lenders from making reverse
mortgages until they receive a signed certification
that the borrower received independent counseling
about the transaction, prohibited lenders from
requiring a borrower to purchase an annuity as part of
the reverse mortgage transaction, and added the
AB 329 (Feuer), Page 12
reverse mortgage language translation requirement
summarized above.
POSITIONS
Support
California Advocates for Nursing Home Reform (co-sponsor)
California Alliance for Retired Americans (co-sponsor)
AAA Advisory Council
AARP California
Aging Services of California
California Commission on Aging
California Senior Legislature
Center for Responsible Lending
Congress of California Seniors
Consumer Attorneys of California
Professional Fiduciary Association of California
Trusts and Estates Section of the California State Bar
Oppose
None received
Consultant: Eileen Newhall (916) 651-4102