BILL ANALYSIS                                                                                                                                                                                                    






                        SENATE COMMITTEE ON BANKING, FINANCE,
                                    AND INSURANCE
                           Senator Ronald Calderon, Chair


          SB 660 (Wolk)                 Hearing Date:  May 6, 2009  

          As Amended April 27, 2009
          Fiscal:             No
          Urgency:       No
          

           SUMMARY    Would impose a duty of honesty, good faith, and fair  
          dealing on any lender, broker, person, or entity who recommends  
          the purchase of a reverse mortgage to a borrower in anticipation  
          of financial gain, and would require the lender, broker, person,  
          or entity to have reasonable belief that the borrower  
          understands the risks, benefits, and reasonable alternatives  
          involved in the purchase of a reverse mortgage.
           
          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.  Provides consumers with a three-day right to rescind a  




                                                  SB 660 (Wolk), Page 2




              consumer credit transaction, 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.  Establishes, within the United States Department of Housing  
              and Urban Development (HUD), the Home Equity Conversion Mortgage  
              (HECM) program, to provide federal insurance for reverse  
              mortgages that meet HUD requirements.  Makes HECM loans  
              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.  Provides, however, that loan may become due  
              earlier if the borrower(s) fails to pay property taxes or  
              maintain the home, as specified in the loan agreement.  Provides  
              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.  Requires 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.  Requires 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.  Requires the lender, at the time of initial contact,  
              to provide the borrower with a list of HUD-approved counseling  
              agencies (12 USC Section 1715z-20; 24 CFR 206.41);

            6.     Requires all HECM loan counselors to be approved by HUD and  
              meet HUD standards, as specified.  Further requires the  
              Secretary of HUD to develop uniform counseling protocols by July  
              30, 2009.  The protocols 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, and the affect of the loan on  
              eligibility for government assistance programs (12 USC 1715z-20;  
              24 CFR Section 214.103);

            7.     Prohibits 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  




                                                  SB 660 (Wolk), Page 3




              HECM loan have no involvement with, or incentive to provide the  
              borrower with, any other financial or insurance product.   
              Specifies 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).

          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 that 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  
                      HUD-approved housing counseling agency;

                     ii.         Provide the borrower with a list of at least  
                      five HUD-approved housing counseling agencies, 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  




                                                  SB 660 (Wolk), Page 4




                      must include the date of counseling, and the name,  
                      address, and telephone numbers of both the counselor and  
                      the borrower;

               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 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.  Imposes a special duty of honesty, good faith, and fair dealing  
              on an insurer, broker, agent, and all others engaged in the  
              transaction of insurance with a prospective insured who is 65  
              years of age or older, as specified (Insurance Code Section  
              785), and establishes several requirements that must be followed  
              and prohibitions that must be observed when seniors age 65 or  
              older are marketed or sold insurance policies (Insurance Code  
              Sections 785 et seq.);

           6.  Authorizes the Insurance Commissioner to assess an  
              administrative penalty for the violation of the duty immediately  
              above and other provisions relating to the sale of insurance to  
              seniors; authorizes actions for injunctive relief, penalties,  
              damages, and restitution for violating the sections of law  
              relating to the sale of insurance products to seniors to be  
              brought in superior court by the Attorney General, a district  
              attorney, or city attorney; and authorizes the court to award  
              reasonable attorney's fees and court costs to the prevailing  
              plaintiff (Insurance Code Sections 789 and 789.3);

           7.  Allows seniors to rescind an individual life insurance policy  
              or individual annuity contract, and receive a refund of all  




                                                  SB 660 (Wolk), Page 5




              premiums and fees paid, for 30 days following the purchase of  
              such policy or contract, and requires certain disclosures in  
              that regard (Insurance Code Section 10127.10);

           8.  Imposes a duty of honesty, good faith, and fair dealing on all  
              insurers, brokers, agents, and others engaged in the business of  
              insurance, with respect to policyholders or prospective  
              policyholders of long-term care insurance (Insurance Code  
              Section 10234.8), requires every insurer or other entity  
              marketing long-term care insurance to develop and use  
              suitability standards to determine whether the purchase or  
              replacement of long-term care insurance is appropriate for the  
              needs of the applicant, train its agents in the use of those  
              suitability standards, and develop procedures that take the  
              following into account (Insurance Code Section 10234.95):

               a.     The ability to pay for the proposed coverage and other  
                 pertinent financial information related to the purchase of  
                 the coverage;

               b.     The applicants goals or needs with respect to long-term  
                 care, and the advantages and disadvantages of insurance to  
                 meet those goals or needs;

               c.     The value, benefits, and costs of the applicant's  
                 existing insurance, if any, when compared to the values,  
                 benefits, and costs of the recommended purchase or  
                 replacement;

           9.  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).

           Existing common law
            
            1.  Imposes a fiduciary duty on investment advisors with respect  
              to the advice they provide to their clients, pursuant to a 1963  
              case decided by the United States Supreme Court (SEC v. Capital  
              Gains Research Bureau, Inc, 375 U.S. 180, 84 S. Ct. 275).  The  
              Supreme Court held that Section 206 of the Advisers Act, which  
              generally makes it unlawful for an investment adviser to engage  




                                                  SB 660 (Wolk), Page 6




              in fraudulent, deceptive, or manipulative conduct, imposes a  
              fiduciary duty on investment advisers, by operation of law;

            2.  Imposes a fiduciary duty on mortgage brokers, pursuant to a  
              1979 case decided by the California Supreme Court (Wyatt v.  
              Union Mortgage Company, 24 Cal. 3d 773, 23748).  In that case,  
              the court concluded that specified provisions of the Business  
              and Professions Code and the Civil Code, working together,  
              "impose upon mortgage loan brokers an obligation to make a full  
              and accurate disclosure of the terms of a loan to borrowers and  
              to act always in the utmost good faith toward their principals."  
               






































                                                  SB 660 (Wolk), Page 7




           This bill

            1.  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 provide that these duties are in addition to any  
              other duties, express or implied, that may exist;

           2.  Would further require the lender, broker, person, or entity  
              referenced above to have reasonable belief that the borrower  
              understands the risks, benefits, and reasonable alternatives  
              involved in the purchase of a reverse mortgage.

           COMMENTS

          1.  Purpose of the bill    To protect seniors from obtaining  
              reverse mortgages that are unsuitable for them, and, in  
              doing so, help seniors avoid the devastating effects of an  
              unsuitable reverse mortgage loan.  

           2.  Background   A reverse mortgage is a home loan that allows 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.  Because 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), the discussion below will  
              focus on the rules that apply to HECMs.  

          There are, however, rules which apply to all reverse mortgages,  
              not just HECMs, something which adds a level of complexity  
              to the discussion about this bill.  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 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  




                                                  SB 660 (Wolk), Page 8




              mortgages made by federally-regulated lenders.  

          Representatives of federally-regulated lenders have informed  
              Committee staff that their clients are following  
              California's reverse mortgage laws at the present time.    
              They are not willing to speculate about whether  
              federally-regulated lenders would continue to follow  
              California's reverse mortgage laws, if they were changed in  
              a way that imposed significant legal liability on the  
              lenders.  Thus, this bill would clearly apply to reverse  
              mortgages originated by state-regulated lenders, regardless  
              of whether those mortgages were FHA-insured.  It is unclear  
              whether federally-regulated reverse mortgage lenders would  
              comply with the provisions of this bill.  

          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  
              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.




                                                  SB 660 (Wolk), Page 9





          A variety of homes are eligible for HECMs, 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 - 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  
              interest rate, the less money the borrower receives.  

          HECM loans also include several fees, including an origination  
              fee, closing costs, mortgage insurance premiums, interest,  
              and servicing fees.  

          When a senior borrower sells his home or no longer uses it as  
              his or her 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  




                                                  SB 660 (Wolk), Page 10




              remaining equity in the home, if any, belongs to the  
              borrower or his or her heirs.  The loan also becomes due and  
              payable in any of the following additional circumstances:   
              1) the borrower does not pay property taxes or hazard  
              insurance; 2) 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 3) the  
              borrower allows the property to deteriorate, and does not  
              make necessary repairs.  

           3.  Discussion   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.  

          Those who support this bill want to ensure that no senior is  
              sold a reverse mortgage that is unsuitable for them.  They  
              point to inappropriate use by seniors of reverse mortgage  
              proceeds, which leave the seniors destitute when they are in  
              greatest need of financial resources to support their  
              increased care needs.  Those in opposition are concerned  
              about the duties this bill would place on lenders, and the  
              liability those duties would carry.  They claim that the  
                                  bill could have a chilling effect on the reverse mortgage  
              industry.  

          As noted above in the lengthy description of existing law,  
              California law, federal law, and case law recognize a  
              heightened duty on those who sell several types of financial  
              and insurance products to seniors, on those who act as  




                                                  SB 660 (Wolk), Page 11




              investment advisers, and on those who broker mortgages.   
              Existing law also contains provisions intended to protect  
              seniors who are considering the purchase of reverse  
              mortgages, and provisions intended to identify and stop  
              elder and dependent financial abuse.  Despite the existence  
              of these multiple laws, all of which carry important  
              protections for seniors, this bill's sponsor and its  
              supporters assert that a significant number of seniors are  
              taking out reverse mortgages, and using the proceeds of  
              those mortgages inappropriately.  

          The co-existence of multiple protections in existing law to  
              protect seniors, and evidence that seniors are  
              inappropriately using reverse mortgage proceeds, prompt two  
              of the key questions for this Committee, when it considers  
              SB 660.  Specifically:

                  a.        If all of the state and federal laws and case  
                    law on the books are insufficient to protect seniors  
                    from misusing the proceeds of reverse mortgages, will  
                    adding another law, as this bill proposes to do, make  
                    a positive difference?

                  b.        What aspects of existing law are insufficient  
                    to protect seniors considering the purchase of a  
                    reverse mortgage, and how, if at all, should existing  
                    law be modified to improve its effectiveness?

              Other key questions include the following:

                  c.        Those who broker reverse mortgages already  
                    have a fiduciary duty toward borrowers.  Is that  
                    fiduciary duty being observed?  If not, should it be  
                    more clearly stated in existing law?  

                  d.        Alternately, is the problem one of  
                    enforcement?  Are enforcement resources adequate to  
                    ensure that those who owe fiduciary and other duties  
                    to seniors are following the law?

                  e.        Seniors are required to receive counseling  
                    before they are sold a reverse mortgage.  Is that  
                    counseling adequate?  

                  HUD, the department responsible for certifying those who  
                    perform the counseling, appears to think it is not.  A  




                                                  SB 660 (Wolk), Page 12




                    recent article in American Banker magazine ("Mortgage  
                    Pipeline," dated April 2, 2009) stated, "HUD is also  
                    concerned that the mandatory counseling for senior  
                    citizens who are considering reverse mortgages is not  
                    as impartial as it could be.  A ? letter to lenders  
                    posted on HUD's web site Friday reiterated that a  
                    lender cannot contact a counselor or counseling agency  
                    to refer prospective borrowers, discuss the timing or  
                    scheduling of the counseling or request information  
                    regarding the topics covered in counseling.  'HUD is  
                    aware of instances in which a lender, or lenders, have  
                    dialed a counseling agency's phone number and then  
                    handed the phone to the borrower to schedule  
                    counseling?The borrower must take the initiative.'"  

                  In conversations with the sponsor prior to this bill  
                    hearing, the sponsor indicated that SB 660 is not  
                    about the quality of the counseling provided to  
                    seniors.  Should it be?  

           4.  Concerns   As drafted, the bill's requirement that a lender  
              have a reasonable relief that a senior understands the  
              risks, benefits, and reasonable alternatives of the reverse  
              mortgage is problematic, because the bill offers no  
              direction about how the author intends this language to be  
              interpreted.  

          The bill is unclear, for example, on whether a lender, broker,  
              person, or entity who recommends the purchase of a reverse  
              mortgage may rely upon the requirement that seniors receive  
              counseling before they are able to obtain a reverse mortgage  
              as the basis for their reasonable belief that the senior  
              understands the reverse mortgage.  

          If, as is likely, the bill's language is premised on a belief  
              that the existing counseling requirement is insufficient  
              basis for a lender, broker, person, or entity to have a  
              reasonable belief that the senior understands the risks,  
              benefits, and reasonable alternatives involved in his or her  
              purchase of a reverse mortgage, the author's language is  
              likely to result in significant litigation over what can  
              form the basis for a reasonable belief.  Lenders, brokers,  
              and others may be considerably less likely to recommend the  
              purchase of a reverse mortgage, if they fear being sued over  
              the basis for their recommendations.  





                                                  SB 660 (Wolk), Page 13




          Amendments are suggested below (see Suggested Amendments  
              section) to address these concerns.  
           
           5.  Support   The sponsor of this bill, California Advocates for  
              Nursing Home Reform (CAHNR) believes that SB 660 will help  
              many seniors avoid the devastating effects of an unsuitable  
              reverse mortgage loan.  

          CAHNR states that reverse mortgages are aggressively marketed to  
              seniors and being touted, irresponsibly in CAHNR's view, as  
              a smart way to improve a senior's quality of life.  Those  
              who market reverse mortgages do not stress that these are  
              very expensive loans that will, in a relatively short period  
              of time, strip the home of its net worth.  "Seniors are told  
              that they never have to worry about leaving their home or  
              owing more than the value of their home?This is not  
              altogether true.  Borrowers with reverse mortgages can and  
              do get foreclosed on.  If they can't keep up with the  
              continual financial payments for insurance, property taxes,  
              and maintenance of the home the loan goes into default.   
              Seniors without the means to fix their leaky roofs will end  
              up in default."

          CAHNR also believes that the state of California has an interest  
              in ensuring that only suitable reverse mortgages are sold to  
              seniors.  Low-wealth seniors who obtain reverse mortgages  
              and subsequently need to move into assisted living  
              facilities may be left with little or no money with which to  
              afford private pay facilities.  These seniors may ultimately  
              have no option but to move into a nursing home that accepts  
              Medi-Cal.  The state will have no option but to pay for that  
              care.  

          CAHNR 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.





                                                  SB 660 (Wolk), Page 14




          Aging Services of California (Aging Services) sees SB 660 as  
              providing needed protection for seniors.  The organization  
              states that, without the protections in SB 660, thousands of  
              seniors will be sold reverse mortgages that radically affect  
              established estate plans, retirement destinations, and care  
              for dependent children.  Aging Services members have  
              witnessed seniors working their way to the top of a waiting  
              list for assisted living, only to find their resources so  
              depleted by reverse mortgages that they can no longer fund  
              their retirement plans.  

          The California Alliance for Retired Americans (CARA) writes  
              that, while reverse mortgages may not be fraudulent per se,  
              they are extremely complex and expensive to use, and are  
              being marketed to seniors as the answer to all of their  
              financial problems, without any downside.  CARA sees SB 660  
              as a bill that brings needed regulation to the reverse  
              mortgage market, and will protect seniors from possible  
              abuses. 

          The California Association of Mortgage Brokers believes the bill  
              is a reasonable effort to help further transparency, and  
              help ensure that counselors involved in the reverse mortgage  
              process discus all known issues that may impact a senior's  
              decision to take out a reverse mortgage.  

           6.  Opposition    The California Bankers Association, California  
              Chamber of Commerce, California Financial Services  
              Association, California Independent Bankers Association, and  
              California Mortgage Bankers Association (the coalition)  
              oppose SB 660, on grounds that the bill will expose lenders  
              to significant legal liability, and have a chilling effect  
              on the reverse mortgage industry.

          To the coalition, the requirements of SB 660 appear to imply  
              that the protections in existing state and federal law are  
              insufficient.  The coalition would prefer to address those  
              deficiencies in a targeted manner that will not adversely  
              impact the sale of reverse mortgage products.  Furthermore,  
              the coalition states that, as drafted, "SB 660 would  
              effectively create a fiduciary duty for lenders who offer  
              reverse mortgages, as it would require lenders to somehow  
              make a subjective determination about the borrower's  
              understanding of reverse mortgages, as well as the  
              'reasonable alternatives' available to them.  How is a  
              lender supposed to quantify the 'reasonable beliefs' of a  




                                                  SB 660 (Wolk), Page 15




              borrower?  How would a lender verify that a borrower  
              understands what 'reasonable alternatives' are available to  
              them or that they fully understand all of the 'risks' and  
              'benefits' of a reverse mortgage?  Who could bring suit for  
              a purported violation of this measure?  Could a  
              'prospective' borrower file suit even if they don't  
              ultimately purchase a reverse mortgage?  How long would a  
              party have to file suit?  Finally, what are the damages for  
              a purported violation of this measure?"

          The California Credit Union League (CCUL) sees SB 660 as a  
              well-intentioned measure, which, in seeking to impose  
              standards on the bad actors in the marketplace, will instead  
              negatively affect responsible lenders.  CCUL cites concerns  
              with a number of terms in the bill.  First, it is unclear  
              whether the bill applies to situations in which a credit  
              union member visits a credit union to request a reverse  
              mortgage.  If a lender responds to a request from its  
              customer to provide that customer with a reverse mortgage,  
              is the lender recommending the purchase of a reverse  
              mortgage to the senior?  

          CCUL also echoes the concerns expressed above about the  
              "reasonable belief" terminology in the bill.   Once a senior  
              receives counseling from a HUD-certified counselor (as  
              required by existing law), can the credit union use a  
              certificate that counseling is complete as the basis for a  
              reasonable belief that the borrower understands the risks,  
              benefits, and reasonable alternatives involved in the  
              purchase of the reverse mortgage?   CCUL is concerned that,  
              as drafted, the bill will result in the courts answering  
              that question.

          CCUL is also concerned about the new duty of honesty, good  
              faith, and fair dealing that SB 660 would impose.  Credit  
              unions fearing liability from the new duty might refuse to  
              offer a reverse mortgage to a credit union member who wished  
              to obtain one.  "Simply put, the liabilities that would be  
              imposed by SB 660 and the potential for legal action against  
              a credit union are severe enough that many of the credit  
              unions in California would eliminate this product for their  
              members."   

           7.  Suggested Amendments   If this Committee wishes to address  
              some of the concerns, expressed above, about the "reasonable  
              belief" language in the bill, and support an alternate  




                                                  SB 660 (Wolk), Page 16




              approach to protecting seniors who engage in reverse  
              mortgage transactions, the following amendments are  
              suggested:

          Amend the existing language of the bill, as follows:

          1923.1 is added to the Civil Code, to read:  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 shall have reasonable belief that the borrower  
              understands the risks, benefits, and reasonable alternatives  
              involved in the purchase of a reverse mortgage.  These  
              duties are in addition to any other duties, express or  
              implied, that may exist.

          In addition, add amendments to Section 1923.5 of the Civil Code  
              to the bill, as follows:

          1923.5.   (a)    No reverse mortgage loan application shall be  
              taken by a lender unless the loan applicant has received  
              from the lender, prior to receiving counseling, 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.  

              (b) (1) In addition to the plain statement notice described  




                                                  SB 660 (Wolk), Page 17




              in subdivision (a), no reverse mortgage loan application  
              shall be taken by a lender unless the lender provides the  
              prospective borrower, prior to his or her meeting with a  
              counseling agency on reverse mortgages, with a written  
              checklist which conspicuously alerts the prospective  
              borrower, in 12-point type or larger, that he or she should  
              discuss with the agency counselor the following issues: 

              (A) How unexpected medical or other events that cause the  
              prospective borrower to move out of the home earlier than  
              anticipated will 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,
              including, but not limited to, less costly home equity lines  
          of
              credit, property tax deferral programs, or governmental aid  
          programs.
               
              (C) Whether the prospective borrower intends to use the  
          proceeds
              of the reverse mortgage to purchase an annuity or other  
          insurance
              products 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.  

              (F) The impact that 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.  

              (2) The checklist required in paragraph (1) shall be signed  
          by the




                                                  SB 660 (Wolk), Page 18




              agency counselor and by the prospective borrower and  
          returned to the
              lender along with the certification of counseling required  
          under
              subdivision (l) of Section 1923.2, and the loan application  
          shall not
              be approved until the signed checklist is provided to the  
          lender. A
              copy of the checklist shall be made provided to the  
          borrower. 
                
           8.  Comparing This Bill to New HUD Counseling Protocols   As  
              noted in the Existing federal law section of this bill, HUD  
              is required to develop uniform counseling protocols for HECM  
              loans by July 30, 2009.  Once those protocols are available,  
              Committee staff recommends that the author review them, and  
              ensure that the checklist in her bill is consistent with,  
              and not in conflict with, the new HUD protocols.  
           
           9.  Prior and Related Legislation  

                  a.        AB 329 (Feuer), as amended April 16, 2009:   
                    Requires lenders to provide the written checklist  
                    described immediately above in the Suggested  
                    Amendments section to prospective borrowers, before  
                    the borrowers seek reverse mortgage counseling;  
                    prohibits a lender or any other person who originates  
                    a reverse mortgage from participating in, being  
                    associated with, or employing any party that  
                    participates in or is associated with any other  
                    financial or insurance activity; prohibits these  
                    entities from referring a prospective borrower to  
                    anyone for the purchase of other financial or  
                    insurance products; requires the lender to provide the  
                    prospective borrower with a list of at least 10  
                    HUD-certified housing counseling agencies; and  
                    provides borrowers with a 30-day right to rescind a  
                    reverse mortgage contract into which they enter.   
                    Pending in the Assembly Banking & Finance Committee.

                  b.        SB 1609 (Simitian), Chapter 202, Statutes of  
                    2006:  Added the language prohibiting lenders from  
                    making a reverse mortgage until it receives a signed  
                    certification that the borrower received independent  
                    counseling about the transaction, prohibited lenders  
                    from requiring a borrower to purchase an annuity as  




                                                  SB 660 (Wolk), Page 19




                    part of the reverse mortgage transaction, and added  
                    the reverse mortgage translation requirement  
                    summarized above.

                  c.        SB 192 (Scott), 2005-06 Legislative Session:   
                    Would have required a life agent, or an insurer, where  
                    no agent was involved, to have reasonable grounds for  
                    believing that the sale of an annuity to a senior was  
                    suitable, on the basis of facts disclosed by the  
                    senior, as specified.  Passed the Senate, never taken  
                    up by the author in the Assembly Insurance Committee.

                  d.        AB 2316 (Chan), Chapter 835, Statutes of 2004:  
                     Created a Life and Annuity Consumer Protection  
                    Program, dedicated to protecting consumers of life  
                    insurance and annuity products in California.

                  e.        SB 620 (Scott), Chapter 547, Statutes of 2003:  
                     Prohibited the sale of annuities to seniors in  
                    certain circumstances; required training for life  
                    agents as a condition of selling annuities, as  
                    specified; enacted additional restrictions on  
                    advertising practices that target senior citizens;  
                    imposed restrictions on the sale of life insurance  
                    policies and annuities in a senior citizen's home; and  
                    enacted other changes intended to protect senior  
                    consumers who are being marketed life insurance  
                    policies or annuities.  
                   
          POSITIONS
          
          Support
           
          California Advocates for Nursing Home Reform (sponsor)
          Aging Services of California
          California Alliance for Retired Americans
          California Association of Mortgage Brokers
           
          Oppose
               
          California Bankers Association
          California Chamber of Commerce
          California Financial Services Association
          California Independent Bankers Association
          California Mortgage Bankers Association
          California Credit Union League




                                                  SB 660 (Wolk), Page 20





          Consultant:   Eileen Newhall (916) 651-4102