BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 660
Senator Wolk
As Amended April 27, 2009
Hearing Date: May 12, 2009
Civil Code
BCP:jd
SUBJECT
Reverse Mortgages
DESCRIPTION
This bill 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.
This bill would additionally require the lender to provide a
specified checklist to a mortgage loan applicant prior to their
mandatory counseling session. That checklist must be signed by
both the counselor and prospective borrower and returned to the
lender prior to the approval of a loan application.
(This analysis reflects author's amendments to be offered in
committee.)
BACKGROUND
A reverse mortgage is a loan that allows a homeowner who is aged
62 or older to borrow against the equity of his or her home in
order to get immediate access to funds, either in a lump sum or
through periodic payments. The principal and interest on the
loan generally will not come due until the borrower dies or
sells the home.
Reverse mortgages can be risky for certain seniors, and both
federal and state law mandate counseling before entering into a
reverse mortgage transaction. Regarding the risks posed to
seniors, the Wall Street Journal's April 11, 2009 article
(more)
SB 660 (Wolk)
Page 2 of ?
entitled "Reverse Mortgage: Get Cash, But Use Caution" noted:
While it makes sense to suspend withdrawals from beaten-down
retirement accounts, taking out a reverse mortgage is an
expensive way to achieve this, warns Vincent Russo, an
elder-law specialist with several offices in New York.
Homeowners pay a 2% origination fee on the first $200,000
they borrow plus 1% on the rest, with the total capped at
$6,000. But origination fees are only one part of the
overall cost of these loans, which can total as much as 10%
of a home's value, according to David Certner of AARP, the
advocacy group for older people. . . . Still, using a
reverse mortgage to finance the "good life" can be risky.
With a reverse mortgage, you're likely to consume a large
portion -- if not all -- of your home equity. As a result,
if you need cash for future needs, including long-term care,
your home equity will no longer be available.
To enhance the current protections for seniors, this bill would
state that any person who recommends a reverse mortgage, with
anticipation of financial gain, owes a duty of honesty, good
faith, and fair dealing, and would require a checklist to be
provided prior to the mandatory counseling session that is
required under state law.
This bill was approved by the Senate Banking, Finance and
Insurance Committee on May 6, 2009.
CHANGES TO EXISTING LAW
Existing federal regulations define a "reverse mortgage" as a
nonrecourse consumer credit obligation in which one or more
advances are secured by the consumer's "principal dwelling," but
no payments from the consumer are due until: (1) the consumer
dies; (2) the dwelling is sold; or (3) the consumer stops
occupying the dwelling as a principal dwelling. (12 C.F.R. Sec.
226.33.)
Existing state law defines a "reverse mortgage" as a nonrecourse
loan secured by a borrower's owner-occupied principal residence
which: (1) provides cash advances based on the value of the
residence; (2) requires no payment of principal or interest
until the entire loan becomes due; and (3) is made by a lender
licensed and chartered pursuant to state or federal law. (Civ.
Code Sec. 1923.) A loan is due when: (1) the residence securing
SB 660 (Wolk)
Page 3 of ?
the loan is sold or transferred; (2) all borrowers stop
occupying the dwelling as a principal residence, as specified;
(3) a fixed maturity date occurs; or (4) an event specified in
the loan documents occurs, which jeopardizes the lender's
security. (Civ. Code Sec. 1923.2(f).)
Existing federal regulations , the Truth in Lending Act, requires
all lenders who offer reverse mortgages to make specified
disclosures to a borrower before the closing of the transaction
that include a "good-faith projection of the total cost of the
credit," including costs and advances to a borrower (accounting
for any annuities sold as part of the transaction) and
projections of the total cost of the transaction based on
different appreciation rates and loan periods. (12 C.F.R. Secs.
226.31, 226.33.)
Existing federal regulations also establish that a borrower may
rescind a reverse mortgage contract within three days of
executing the contract. (12 C.F.R. Sec. 226.15.) This right of
rescission does not apply, however, to a reverse mortgage that
is used to purchase a residence. (12 C.F.R. Sec. 226.15(f).)
Existing federal law places additional restrictions on reverse
mortgages that are federally insured. A reverse mortgage may
only be federally insured if it is provided to mortgagors who:
(1) are at least 62 years of age; (2) have received adequate
counseling by a third party; and (3) have received full
disclosure of all costs. (12 U.S.C.S. Sec. 1715z-20(d)(2).)
For the third-party counseling requirement, a mortgagee must
provide a list of contact information for reverse mortgage
counselors who are approved by the Secretary of the Department
of Housing and Urban Development at the time of the mortgage
application. (12 U.S.C.S. Sec. 1715z-20(e)(1).)
Existing state law requires a lender to refer a prospective
borrower to an HUD approved housing counseling agency prior to
accepting a final and complete application for a reverse
mortgage or assessing any fees. The counseling shall meet the
standards established by HUD for reverse mortgage counseling.
(Civ. Code Sec. 1923.3(j).)
Existing state law prohibits a lender from accepting a final and
complete application for a reverse mortgage loan from a
prospective applicant, or assessing any fees, without receiving
a certification from an applicant or their representation that
the applicant received counseling, as specified. (Civ. Code Sec.
SB 660 (Wolk)
Page 4 of ?
1923.3(k).)
Existing state law requires a lender to provide a statement to a
prospective borrower before accepting a reverse mortgage loan
application, advising the borrower in 16-point type, among other
things, that: (1) it is important to understand the terms of the
reverse mortgage; and (2) that the borrower is required to
consult with an independent loan counselor before entering into
the transaction. (Civ. Code Sec. 1923.5.)
This bill would specify that the above statement must be
provided prior to receiving counseling. This bill would
additionally provide that 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, with a written checklist that conspicuously
alerts the borrower in 12-point type or larger, that he or she
should discuss the following issues:
impact of unexpected medical events that cause a borrower to
move out of the home earlier than anticipated;
extent to which their financial needs would be better met by
an option other than a reverse mortgage;
the consequences of using the proceeds to purchase an annuity
or other insurance product;
the effect of repayment of the loan on nonborrowing residents
after all borrowers have died or permanently left the home;
the prospective borrower's ability to finance routine or
catastrophic repairs;
the impact that the reverse mortgage may have on the
prospective borrower's tax obligation, eligibility for
government assistance, and the effect that losing equity in
the home will have on the borrower's estate and heirs; and
the ability of the borrower to finance alternative living
accommodations.
This bill would require the above checklist to be signed by both
the agency counselor and the prospective borrower. That
checklist must be returned to the lender along with the
certification of counseling required by Section 1923.2(l), and
the loan application shall not be approved until the signed
checklist is provided to the lender. A copy of the checklist
shall be provided to the borrower.
This bill would additionally provide that any lender, broker,
person, or entity who recommends the purchase of a reverse
mortgage in anticipation of financial gain, owes the borrower a
SB 660 (Wolk)
Page 5 of ?
duty of honesty, good faith, and fair dealing. This bill would
specify that those duties are in addition to any other duties
that may exist.
COMMENT
1. Stated need for the bill
The California Advocates for Nursing Home Reform, sponsor,
states:
Reverse mortgages are being aggressively marketed to
seniors. They are being touted as the smart way to improve
the quality of life with suggestions that they can be used
for things such as vacations and gifts. This claim is very
irresponsible on the part of the industry. What is not
stressed is that these are very expensive loans that will,
in a relatively short amount of time, strip the home of its
net worth. . . .
The state of California has an interest in assuring that
only suitable reverse mortgages are sold to seniors.
Low-wealth seniors who become involved with unsuitable
reverse mortgage loans run the ultimate risk of becoming a
financial burden to the state. Seniors with reverse
mortgages may find themselves unable to move into assisted
living, as these types of facilities require private pay.
As a result, seniors who are no longer capable of living
independently and who cannot afford private pay may have no
option other than to move into a nursing home that accepts
Medi-Cal. California cannot afford to pick up the pieces
for the thousands of seniors who will be forced to depend on
Medi-Cal for their expensive nursing home care. . . .
SB 660 offers a reasonable approach to protect seniors from
becoming involved with unsuitable reverse mortgage loans
that may have devastating financial consequences to the
senior borrowers and ultimately to the State of California.
2. Duty of honesty, good faith, and fair dealing
To further protect seniors, this bill would state that any
person who recommends the purchase of a reverse mortgage in
anticipation of financial gain would owe the prospective
borrower a duty of honesty, good faith, and fair dealing.
SB 660 (Wolk)
Page 6 of ?
Questions have been raised regarding what those duties, in fact,
would entail.
a. UCC definition of good faith
With regards to contracts covered by the Uniform Commercial
Code (UCC), "good faith" has been generally defined as
"honesty in fact and the observance of reasonable commercial
standards of fair dealing." (U.C.C. Sec. 1-201(20.)
Similarly, the Restatement Second of Contracts states:
The phrase "good faith" is used in a variety of contexts,
and its meaning varies somewhat with the context. Good
faith performance or enforcement of a contract emphasizes
faithfulness to an agreed common purpose and consistency
with the justified expectations of the other party; it
excludes a variety of types of conduct characterized as
involving "bad faith" because they violate community
standards of decency, fairness or reasonableness. The
appropriate remedy for a breach of the duty of good faith
also varies with the circumstances.
In the present case, all of the three proposed duties
(honesty, good faith, and fair dealing) are found in the broad
definition of "good faith" under the UCC. Thus, the proposed
standard essentially adopts the broad definition of "good
faith" under the UCC, but does not provide guidance for those
who must comply with the duties imposed. (See Comment 2(b).)
b. Violation of duties
Although the bill imposes a broad duty of good faith on
individuals who would recommend the purchase of a reverse
mortgage, the bill does not detail what specific actions would
constitute a violation of that duty. Despite that lack of
specificity, this would not be the first time that California
has statutorily imposed a duty of honesty, good faith, and
fair dealing without detailing the specific acts that violate
those duties. (See e.g. Ins. Code Sec. 785.) As noted above,
those duties are also inherent in contracts themselves
(although the duties may be narrower in some contexts, and
parties may specify what constitutes a breach of the duties).
It should also be noted that some of the individuals covered
by these duties may already owe a fiduciary duty to the
SB 660 (Wolk)
Page 7 of ?
purchaser of the reverse mortgage. For example, the
California Supreme Court in Wyatt v. Union Mortgage Company
(1979) 24 Cal.3d 773 stated that existing provisions of
California law "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." (Id. at 782.) That duty
(utmost good faith) for mortgage brokers encompasses (and goes
beyond) the duties proposed by this bill.
CANHR further states that the above duties (as well as the
check-list) are necessary "because reverse mortgages are very
complex and expensive loans and, when unsuitable, can
devastate a senior's estate plan." Given that the proposed
standard is subjective, the author and sponsor should continue
to work with the committee to ensure that the standard
addresses the problems involved with reverse mortgages by
specifying which actions should constitute a breach of the
above duties.
c. Statement that the duties are in addition to any other
duties, express or implied, that may exist
This bill further states that the above duties "are in
addition to any other duties, express or implied, that may
exist." Although a similar phrase appears in Section 785 of
the Insurance Code, the statement appears to imply that these
duties do not exist under current law. To remove that
ambiguity, the Committee should consider whether the bill
should be amended to, instead, state: "The duties set forth in
this section shall not be construed to limit or narrow any
other duty of a lender, broker, person, or entity."
SHOULD THE BILL BE AMENDED TO CLARIFY THAT THE DUTIES SET
FORTH DO NOT LIMIT OR NARROW ANY OTHER DUTY?
3. Proposed checklist
Under existing state law, a lender cannot receive a loan
application unless they have provided the borrower with a
specified statement in 16-point type that informs the borrower
that they are required to consult with an independent counselor
before entering into the transaction. Federal law contains a
similar mandatory counseling requirement for mortgages insured
by the Federal Housing Administration (FHA) under the Home
Equity Conversion Mortgage (HECM).
SB 660 (Wolk)
Page 8 of ?
This bill would augment the requirements of state law by
requiring a lender to provide, in addition to the current plain
language statement, a written checklist that informs the
borrower that he or she should discuss a list of issues with the
counselor during the mandatory counseling session. That list
must be signed by the counselor and the borrower, and returned
to the lender before a loan application may be approved.
It is unclear whether the issues that are raised in the
checklist are currently discussed as a matter of course in the
mandatory counseling sections. Considering that state and
federal law already require counseling in these circumstances,
the addition of a document to guide the discussions should be
helpful so long as the discussion topics are ones that are
beneficial to the individual borrower.
4. Opposition
The California Bankers Association, California Chamber of
Commerce, California Financial Services Association, California
Independent Bankers Association, and the California Mortgage
Bankers Association (collectively the "trade associations")
raise several concerns about the April 27, 2009 version of the
bill.
Specifically, the trade associations state that the requirements
of this bill appear to imply that current protections are
insufficient and that they "welcome the opportunity to work . .
. to try and address those deficiencies in a targeted manner
that will not adversely impact the sale of reverse mortgage
products." The trade associations also express concern that
"the proponents of this measure point to situations where
borrowers used the proceeds from reverse mortgages to purchase
annuities, something which we believe has already been addressed
by state and federal law." The trade associations further
contend that the April 27, 2009 language effectively created a
fiduciary duty, raise questions about who may bring an action
for a violation of the bill's provisions, and question the
damages that would be available in such an action.
The California Credit Union League (CCUL) expresses additional
concern that the April 27, 2009 version of this bill negatively
affects responsible lenders, and that the new duties imposed by
this bill may cause credit unions to refuse to offer reverse
mortgages to credit union members out of liability concerns.
SB 660 (Wolk)
Page 9 of ?
CCUL further states: "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."
It is unknown if the author's amendments detailed in Comment 5
address any of the above concerns by the trade associations and
CCUL.
5. Author's amendments to be offered in Committee
The following amendments were accepted in the Senate Banking,
Finance and Insurance Committee on May 6, 2009, but are to be
taken in this committee due to procedural timing requirements.
The amendments strike out language that would have required
persons recommending the purchase of a reverse mortgage to have
a reasonable belief that the borrower understands certain
aspects about the mortgage. The amends also add the requirement
of a checklist, described in Comment 3.
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.
Add amendments to Section 1923.5 of the Civil Code.
Section 1923.5 of the Civil Code is amended to read:
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
SB 660 (Wolk)
Page 10 of ?
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
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 loan cost.
(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, or inability to repay, 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.
(G) The ability of the borrower to finance alternative
living accommodations such as assisted living or long-term
care nursing home residency, after the borrower's equity is
depleted.
SB 660 (Wolk)
Page 11 of ?
(2) The checklist required in paragraph (1) shall be signed
by the 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.
Support : Aging Services of California; California Alliance for
Retired Americans; California Association of Mortgage Brokers
Opposition : California Bankers Association; California Chamber
of Commerce; California Financial Services Association;
California Independent Bankers Association; California Mortgage
Bankers Association; California Credit Union League
HISTORY
Source : California Advocates for Nursing Home Reform
Related Pending Legislation : AB 329 (Feuer), would require
lenders to provide the written checklist to prospective
borrowers, before the borrowers seek reverse mortgage
counseling; prohibit 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; prohibit those
entities from referring a prospective borrower to anyone for the
purchase of other financial or insurance products; require 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. This bill is currently in the
Assembly Banking & Finance Committee.
Prior Legislation : SB 1609 (Simitian, Chapter 202, Statutes of
2006), prohibited lenders from making a reverse mortgage 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 a reverse mortgage
translation requirement.
Prior Vote : Senate Committee on Banking, Finance, and Insurance
(Ayes 8, Noes 3)
SB 660 (Wolk)
Page 12 of ?
**************