BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 660|
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THIRD READING
Bill No: SB 660
Author: Wolk (D)
Amended: 5/20/09
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 8-3, 5/6/09
AYES: Calderon, Correa, Florez, Kehoe, Liu, Lowenthal,
Padilla, Wolk
NOES: Cogdill, Cox, Harman
NO VOTE RECORDED: Runner
SENATE JUDICIARY COMMITTEE : 3-2, 5/12/09
AYES: Corbett, Florez, Leno
NOES: Harman, Walters
SUBJECT : Reverse mortgages
SOURCE : California Advocates for Nursing Home Reform
DIGEST : This bill imposes 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
additionally requires 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.
CONTINUED
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ANALYSIS : 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.
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. A loan is due
when: (1) the residence securing 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.
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.
Existing federal regulations also establish that a borrower
may rescind a reverse mortgage contract within three days
of executing the contract. This right of rescission does
not apply, however, to a reverse mortgage that is used to
purchase a residence.
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. For the third-party
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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.
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.
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.
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.
This bill:
1. Specifies that the above statement must be provided
prior to receiving counseling, and provides 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:
A. Impact of unexpected medical events that
cause a borrower to move out of the home earlier
than anticipated;
B. Extent to which their financial needs
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would be better met by an option other than a
reverse mortgage;
C. The consequences of using the proceeds to
purchase an annuity or other insurance product;
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 repairs;
F. 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
G. The ability of the borrower to finance
alternative living accommodations.
2. Requires 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.
3. Provides that any lender, broker, person, or entity who
recommends the purchase of a reverse mortgage in
anticipation of financial gain, owes the borrower a 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.
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
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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 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
states 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 5/20/09)
Aging Services of California
California Alliance for Retired Americans
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California Association of Mortgage Brokers
OPPOSITION : (Verified 5/20/09) (prior version of the
bill)
California Bankers Association
California Chamber of Commerce
California Financial Services Association
California Independent Bankers Association
California Mortgage Bankers Association
California Credit Union League
ARGUMENTS IN SUPPORT : The California Advocates for
Nursing Home Reform states that, "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."
ARGUMENTS IN OPPOSITION : The California Bankers
Association, California Chamber of Commerce, California
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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. 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 recent author's amendments address any
of the above concerns by the trade associations and CCUL.
JA:nl 5/20/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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