BILL ANALYSIS
SB 660
Page 1
SENATE THIRD READING
SB 660 (Wolk)
As Amended August 20, 2009
Majority vote
SENATE VOTE : 23-15
BANKING & FINANCE 6-3 JUDICIARY 7-3
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|Ayes:|Nava, Evans, Fong, |Ayes:|Feuer, Brownley, Evans, |
| |Mendoza, Ruskin, Torres | |Chesbro, |
| | | |De La Torre, Lieu, |
| | | |Monning |
|-----+--------------------------+-----+--------------------------|
|Nays:|Niello, Gaines, Tran |Nays:|Tran, Knight, Niello |
| | | | |
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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
breeched based on actions or omissions of a counseling agency
used by the borrower to fulfill the mandatory counseling
requirement.
2)Provides that compliance with existing law may be cited as
evidence demonstrating compliance with the duties of this
subdivision.
3)Specifies that a lender, broker, person, or entity shall not
be deemed to have breeched the duty set forth in subdivision
(a) solely based on the actions or omissions of the counseling
agency.
4)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
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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
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.
5)Provides that if the prospective borrower seeks counseling
prior to requesting a reverse mortgage, the counseling agency
shall provide the prospective borrower with a written
checklist of issues and problems that could arise in the
transaction.
6)Requires that the checklist must be signed by the counselor
and the prospective borrower and returned to the lender with a
certification of counseling.
7)Provides for a notice that must be delivered to reverse
mortgage borrowers that highlights certain risks associated
with reverse mortgages.
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EXISTING FEDERAL LAW :
1)Defines 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)Requires 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
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
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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
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;
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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 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
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,
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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
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
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COMMENTS :
Need for the bill .
The last decade has seen an explosion in the reverse mortgage
market. Reverse mortgages allow senior citizens to convert home
equity into tax-free monthly income or a lump sum cash payout to
spend as they wish. In a conventional "forward" mortgage, the
borrower makes payments to the lender so that debt decreases and
equity increases. In a "reverse" mortgage, the lender makes
payments to the borrower so that debt increases and equity
decreases. The senior (or his or her estate) does not repay the
loan until the last borrower dies, sells the home, or moves out.
The reverse mortgage is a sensible financial tool for many
seniors: it allows them to stay in their homes, provides them
with a supplemental income or needed cash, and eliminates
monthly mortgage payments. When the loan comes due, the house
is typically sold to pay off the debt with any surplus going to
the heirs or the estate.
More than 90% of all reverse mortgages are insured by the
Federal Housing Administration (FHA) under the HECM program,
which is sponsored by HUD. Federal law requires that borrowers
receive "independent counseling" from a HUD-approved counseling
agency and prohibits a lender from making the purchase of an
annuity a condition of obtaining the loan. Existing federal law
also gives the borrower the right to rescind the mortgage
agreement within three days after closing.
California law affords some protections, as most recently
amended by SB 1609 (Simitian), Chapter 202, Statutes of 2006.
Current law prohibits a lender from referring a borrower to a
person or entity that sells annuities and prohibits a lender or
broker from offering an annuity until after closing and the
three-day right of rescission. California law also requires
that the lender provide the borrower with a list of at least
five counseling agencies.
Additionally, a number of lawsuits have been initiated in
California in recent years, involving unscrupulous salespersons
and originators that have encouraged seniors of advanced years
to obtain reverse mortgages and purchase annuities that did not
mature until well after the borrower's life expectancy.
Although many of these lawsuits, alleging various causes of
action from common law fraud to elder financial abuse, are still
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pending or have been summarily dismissed in favor of the
lenders, they illustrate the kinds of problems that can arise.
(See e.g., the following pending cases: Carol Anthony v.
Financial Freedom Senior Funding Corp. et al., Case No. M79107,
Monterey County Superior Court; Andrew Bankhead v. Superior Life
Insurance Services, et. al., Case No. BC399761, Los Angeles
County Superior Court; and Estate of Eileen Bernard, et. al. v.
Wells Fargo Home Mortgage, Inc. et. al. Case No.
37-2008-00083560-CU-FR-CTL, San Diego County Superior Court.;
see also the following appellate court cases arising in
California: Mary Munoz v. Financial Freedom (2008) 573 F. Supp.
2d 1275; Black v. Financial Freedom (2001) 92 Cal. App. 4th
917.)
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.
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4)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.
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.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0002028