BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 660
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          Date of Hearing:   June 29, 2009

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                                  Pedro Nava, Chair
                      SB 660 (Wolk) - As Amended:  June 23, 2009

           SENATE VOTE  :   23-15
           
          SUBJECT  :   Reverse Mortgages.

           SUMMARY  :   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.  Specifically,  this bill  :  
            

          1)Specifies that the duty shall not be deemed to have been  
            breached based on actions or omissions of a counseling agency  
            used by the borrower to fulfill the mandatory counseling  
            requirement.

          2)Prohibits the acceptance of a reverse mortgage application by  
            a lender unless the lender provides the prospective borrower  
            with a check list that alerts the prospective borrower to the  
            following:

             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 residents who are not borrowers after all borrowers  
               have died or permanently left the home;

             e)   The prospective borrower's ability to finance routine or  








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               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; and,

             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.

          3)Requires that the checklist must be signed by the counselor  
            and the prospective borrower and returned to the lender with a  
            certification of counseling.

           EXISTING FEDERAL LAW

           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  
            consumer credit transaction, other than a residential  








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            mortgage, in which a security interest is or will be retained  
            or acquired in a consumer's principal dwelling, as specified  
            (12 CFR 226.23);

          4)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 the HECM  
            loan available to persons 62 years of age and older and  
            provides that the loans, made against home equity, shall not  
            come due until the borrower(s) dies, moves out of the home  
            permanently, or sells the home.  Provides, however, that loan  
            may become due earlier if the borrower(s) fails to pay  
            property taxes or to maintain the home, as specified in the  
            loan agreement.  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 approved HUD 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.  Requires that the protocols require a  
            qualified counselor to discuss, generally, financial options  
            other than a reverse mortgage, the financial implications of  
            reverse mortgages, including any tax consequences, or the  
            affect of the loan on eligibility for government assistance  
            programs (12 USC 1715z-20; 24 CFR Section 214.103);

          7)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  








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            financial or insurance products, unless the lender or  
            originator maintains firewalls and other safeguards designed  
            to ensure that individuals participating in the origination of  
            the HECM loan shall have no involvement with, or incentive to  
            provide the borrower with, any other financial or insurance  
            product.  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 STATE 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; and,

             c)   The loan is made by a lender licensed or chartered  
               pursuant to California or federal law.

          2)Specifies several conditions which must be satisfied by  
            lenders who make reverse mortgage loans, and several  
            prohibitions that apply to those lenders, and includes among  
            those rules, the following [Civil Code Section 1923.2]:

          3)Before a lender may accept a final and complete application  
            for a reverse mortgage loan or assess any fees, that lender  
            must:

             a)   Refer the prospective borrower to a housing counseling  
               agency approved by the United States Department of Housing  
               and Urban Development (HUD);

             b)   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 

             c)   Receive a certification from the applicant or the  








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               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.

          4)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;

          5)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];

          6)Provides that, to the extent that the following rules do not  
            conflict with federal law and result in the loss of federal  
            funding, reverse mortgage loan payments made to a borrower  
            must be treated as proceeds from a loan, and not as income,  
            for the purpose of determining eligibility and benefits under  
            means-tested programs of aid to individuals, as specified  
            [Civil Code Section 1923.9];

          7)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.];

          8)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  








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            relief, penalties, damages, restitution, and all other  
            remedies in law 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];

          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].

           FISCAL EFFECT  :   None

           COMMENTS  :   

           Need for the bill  .

          According to the author, reverse mortgages are loans that allow  
          senior homeowners to convert a portion of their home equity into  
          cash.  They are complex and expensive loans with potentially  
          devastating financial consequences. Yet they are being marketed  
          with impunity to thousands of seniors in California for whom  
          they may or may not be suitable. If the senior borrower is  
          unable to maintain the home or keep up with insurance or tax  
          payments, or is unable to remain at home, the loan becomes due  
          and the senior will end up losing a majority of the equity. When  
          the equity is exhausted, the senior may lose the ability to move  
          into an independent or assisted living community and otherwise  
          provide for long-term care. 

          Existing law has applied the standard of "honesty, good faith,  
          and fair dealing" to the sale of insurance products to seniors  
          for 20 years. The standard is also implicit in common law with  
          regards to contracts and is found in numerous others places in  
          statute.   However, existing law is silent on duties for  
          lenders, brokers, or others who recommend or sell reverse  
          mortgages; existing law does not establish a duty to the  
          borrower; and there are no remedies for breach of a duty when a  








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          reverse mortgage is recommended that is clearly unsuitable.

          The number of federally insured reverse mortgages issued  
          nationwide has skyrocketed in recent years, growing 116% between  
          2005 and 2008.  Coupled with media reports of sub-prime lenders  
          moving into the reverse mortgage market and evidence that the  
          list of seniors suffering from the negative effects of these  
          loans is growing, SB 660 is not only appropriate, but essential.  
          SB 660 will heighten the standard of behavior required by  
          lenders, helping to provide seniors with maximum information  
          about reverse mortgages and protect seniors from those who would  
          take financial advantage of them.

          On May 4, 2009, this committee heard AB 329 (Feuer) also  
          relating to reverse mortgages.  SB 660 overlaps with AB 329, as  
          it relates to items that should be disclosed on the written  
          check-list of items to discuss with a counselor.    However, AB  
          329 contains several items that are not included in AB 329, such  
          as:

          1)Prohibits a lender or any other person that participates in  
            the origination of a reverse mortgage from doing either of the  
            following:

             a)   Participate in, be associated with, or employ any party  
               that participates in or is associated with any other  
               financial or insurance activity, unless the lender  
               maintains firewalls and other safeguards designed to ensure  
               that individuals participating in the origination of the   
               mortgage shall have no involvement with, or incentive to  
               provide the prospective borrower with, any other financial  
               or insurance product; and, 

             b)   Refer the prospective borrower to anyone for the  
               purchase of an annuity or other financial or insurance  
               product. 

          2)Provides that prior to accepting a final and complete  
            application for a reverse mortgage the lender shall provide  
            the borrower with a list of not fewer than 10 counseling  
            agencies that are approved by the United States Department of  
            Housing and Urban Development (HUD) to engage in reverse  
            mortgage counseling.  Provides further that the counseling  
            agency shall not receive any compensation, either directly or  
            indirectly, from the lender or from any other person or entity  








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            involved in originating or servicing the mortgage or the sale  
            of annuities, investments, long-term care insurance, or any  
            other type of financial or insurance product, except as  
            specified.

          To provide further background on this issue, it is worth  
          restating the Senate Judiciary Committee analysis on this issue.

           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.   
          Questions have been raised regarding what those duties, in fact,  
          would entail.

           
          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  








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          the UCC, but does not provide guidance for those who must comply  
          with the duties imposed.  

           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).
           
          Questions and Issues for discussion.
           
          1)What do these duties provide to a consumer that is not  
            available under current law?  If these duties are inherent  
            under most contracts then is it necessary to put them in  
            statute without clear guidance on what the terms mean, or the  
            minimum actions required to comply with the standard.   
            Additionally, with the various prohibitions and requirements  
            that are contained in AB 329 (Feuer), such as the prohibition  
            on cross-selling of insurance products, and the prohibition on  
            the lender and counselor having a financial relationship, do  
            the duties proposed in this bill provide any additional  
            consumer protections?  Furthermore, do these duties provide  
            anything more for consumers in exchange for the additionally  
            liability placed upon lenders.?

          2)In relation to the previous point, what do these duties  
            require of lenders, brokers and others that outside the  
            services they would provide as part of the transaction.  For  
            instance, if the transaction complies with all state and  
            federal legal requirements, has the lender or broker met the  
            standard of good faith, fair dealing and honesty.
           
          3)Are these duties an attempt to require a suitability standard  
            for reverse mortgages?  Do these duties put lenders in a  
            position of deciding if a product is the best option for a  
            borrower when they may not have access to all of the  
            borrower's personal circumstances to make that determination?








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          4)Current federal law for HECMs mandates independent counseling  
            that is intended to make borrowers aware of the potential  
            pitfalls and disadvantages of a reverse mortgage.   
            Furthermore, AB 329 clarifies state law to ensure that  
            borrowers who may apply for non-HECM loans still have the same  
            counseling requirements.   In light of a process that is  
            designed to raise red flags with consumers, are additional  
            requirements necessary?  Do these duties imply that counseling  
            is insufficient?  

          5)Currently, mortgage brokers owe a common law fiduciary duty,  
            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."  This duty has  
            never applied to lenders or their employees.  While this bill  
            does impose a fiduciary duty (A previous version did require a  
            fiduciary duty), the elements of good faith, fair dealing, and  
            honesty are implicit elements in a fiduciary duty standard.

           Arguments in support.

           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                                    








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          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 Financial  
          Services Association, California Independent Bankers  
          Association, and California Mortgage Bankers Association write  
          the following in opposition:

               State law currently provides comprehensive consumer  
          protections for reverse mortgage   applicants.  Reverse  
          mortgages insured by the Federal Housing Administration (FHA)  
          under the Home Equity Conversion Mortgage (HECM) program  
          sponsored by the U.S.         Department of Housing and Urban  
          Development (HUD) are covered by federal          requirements  
          that provide strong consumer protections.  State law for reverse  
          mortgages                     and federal requirements (for  
          HECM's) mandate that reverse mortgage applications           
          receive independent third party HUD approved counseling prior to  
          completing a reverse          mortgage transaction?

               Due to the significant ambiguities in this bill it is  
          unclear how the new duty of honestly,                       good  
          faith, and fair dealing applies to the reverse mortgage  
          transaction?Further, it is                                   
          uncertain what legal exposure exists for a violation of this  
          duty and what the reverse                                    
          mortgage lender can rely on in order to satisfy the duty of  
          honestly, good faith and fair                                
          dealing.  Absent guidance, there is no clear way for a lender to  
          take steps to ensure that                                   they  








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          are in compliance with the new duty.  Give the unanswered legal  
          questions and                                                
          ambiguities this measure would have a chilling effect on reverse  
          mortgage sales.

           Amendments.
           
          This bill is also going to be heard in Assembly Judiciary  
          Committee.   Any amendments that the committee may wish to offer  
          would be taken in Judiciary Committee.  

           Related Legislation
           
          1)AB 329 (Feuer), as amended April 16, 2009:  Contains the  
            provisions described immediately above, and also 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 Senate  
            Judiciary Committee.

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

          3)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.

          4)AB 2316 (Chan), Chapter 835, Statutes of 2004:  Created a Life  
            and Annuity Consumer Protection Program, dedicated to  








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            protecting consumers of life insurance and annuity products in  
            California.

          5)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.  

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          Aging Services of California
          California Advocates for Nursing Home Reform
          California Alliance for Retired Americans
          California Association of Mortgage Brokers
          Consumer Attorneys of California
           
            Opposition 
           
          California Bankers Association
          California Financial Services Association
          California Independent Bankers Association
          California Mortgage Bankers Association


           Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081