BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 329|
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THIRD READING
Bill No: AB 329
Author: Feuer (D)
Amended: 5/27/09 in Senate
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 9-2, 6/17/09
AYES: Calderon, Cogdill, Correa, Harman, Kehoe, Liu,
Lowenthal, Padilla, Wolk
NOES: Cox, Runner
NO VOTE RECORDED: Florez
ASSEMBLY FLOOR : 68-2, 5/14/09 - See last page for vote
SUBJECT : Reverse mortgages
SOURCE : California Advocates for Nursing Home Reform
California Alliance for Retired Americans
DIGEST : This bill amends California reverse mortgage law
to strengthen existing counseling and cross-selling
provisions and requires lenders to provide the borrower
with a checklist prior to counseling that highlights the
risks and alternatives to reverse mortgages.
ANALYSIS : Existing law:
1. Defines a reverse mortgage as a nonrecourse loan
secured by real property, which meets all of the
following criteria:
CONTINUED
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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:
A. Before a lender may accept a final and
complete application for a reverse mortgage loan
or assess any fees, that lender must:
(1) Refer the prospective borrower to
a housing counseling agency approved by the
United States Department of Housing and Urban
Development (HUD);
(2) 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
(3) 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.
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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.
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.
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.
This bill:
1. Prohibits 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. Prohibits a lender or any other person that
participates in the origination of a reverse mortgage
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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 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. Increases 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. Prohibits 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. Revises 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 requires that the
notice be given to the prospective borrower before
that borrower receives counseling:
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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. Provides 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 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
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maintenance is a factor that may determine when the
mortgage becomes payable.
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.
Background
Reverse Mortgages . The vast majority of reverse mortgages
originated at the present time are so-called Home Equity
Conversion Mortgage (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 nine percent, and
a home qualifying for $100,000, a 65-year-old could
borrower up to 34 percent of the home's value; a
75-year-old could borrow up to 47 percent of the home's
value; and, an 85-year-old could borrow up to 64 percent 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 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.
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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
two percentage points per year, and by no more than five
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 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
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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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 6/25/09)
California Advocates for Nursing Home Reform (co-source)
California Alliance for Retired Americans (co-source)
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
ARGUMENTS IN 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.
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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 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, 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.
ASSEMBLY FLOOR :
AYES: Adams, Arambula, Beall, Bill Berryhill, Tom
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Berryhill, Blakeslee, Block, Blumenfield, Brownley,
Buchanan, Caballero, Charles Calderon, Carter, Chesbro,
Cook, Coto, Davis, De La Torre, De Leon, Duvall,
Emmerson, Eng, Evans, Feuer, Fletcher, Fong, Fuller,
Furutani, Galgiani, Garrick, Gilmore, Hagman, Hall,
Hayashi, Hernandez, Hill, Huber, Huffman, Jeffries,
Jones, Krekorian, Lieu, Logue, Bonnie Lowenthal, Ma,
Mendoza, Miller, Monning, Nava, Nestande, Niello,
Nielsen, John A. Perez, V. Manuel Perez, Portantino,
Price, Ruskin, Salas, Silva, Skinner, Solorio, Audra
Strickland, Swanson, Torlakson, Torres, Torrico, Tran,
Yamada
NOES: Anderson, Knight
NO VOTE RECORDED: Ammiano, Conway, DeVore, Fuentes,
Gaines, Harkey, Saldana, Smyth, Villines, Bass
JA:nl 6/25/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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