BILL ANALYSIS
SB 660
Page 1
Date of Hearing: July 1, 2010
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
SB 660 (Wolk) - As Amended: June 24, 2010
SENATE VOTE : Not relevant
SUBJECT : Reverse mortgages
SUMMARY : Provides that any lender, broker, person or entity
who recommends the purchase of a reverse mortgage owes the
borrower a duty of honesty, good faith, and fair dealing.
Specifically, this bill :
1)Provides that the "duty of honesty, good faith, and fair
dealing" shall mean and include an obligation to not do any of
the following:
a) Make or cause to be made any false deceptive, or
misleading statement, representation, or omission in
connection with the reverse mortgage;
b) Originate a reverse mortgage or assess any fees by the
use of undue influence;
c) Originate a reverse mortgage for a wrongful purpose;
d) Originate a reverse mortgage or assess any fee upon a
prospective applicant when the person or entity knows or
should know that the application lacks capacity or is of
unsound mind; or,
e) Originate a reverse mortgage when the person or entity
knows that the reverse mortgage will be used as a tool of
financial abuse.
2)Prohibits the dividing of the reverse mortgage transaction
into separate parts in order to evade application of the
requirements, including but not limited to, using the proceeds
of the reverse mortgage to fund an annuity, insurance, or
investment product within one year from origination of the
reverse mortgage.
EXISTING FEDERAL LAW :
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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 dwelling 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
et seq.; 12 CFR Section 226.33.).
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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)Prohibits any person who participates in the origination of a
reverse mortgage from requiring an applicant for that mortgage
to purchase an annuity as a condition of obtaining the reverse
mortgage loan [Civil Code, Section 1923.2].
2)Prohibits a lender or any other person that participates in
the origination of a reverse mortgage from doing either of the
following:
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a) Participating in, being associated with, or employing
any party that participates in or is associated with any
other financial or insurance activity, unless the lender
maintains procedural safeguards designed to ensure that
individuals participating in the origination of the
mortgage have no involvement with, or incentive to, provide
the prospective borrower with any other financial or
insurance product; or,
b) Referring the borrower to anyone for the purchase of an
annuity or other financial or insurance product prior to
closing the reverse mortgage or before the expiration of
the borrower's right to rescind the reverse mortgage
agreement. [Civil Code, Section 1923.2].
3)Increases the number of HUD-certified counseling agencies that
must be provided by a reverse mortgage lender to a prospective
borrower from five to at least ten [Civil Code, Section
1923.2].
4)Prohibits any HUD-certified housing counseling agency that
counsels a prospective reverse mortgage borrower from
receiving any compensation, either directly or indirectly,
from the lender or from any other person or entity involved in
originating or servicing the mortgage or the sale of
annuities, investments, long-term care insurance, or any other
type of financial insurance product, but would clarify that
this prohibition does not extend to financial assistance
provided by a lender as part of its charitable or
philanthropic activities and which is unrelated to the
offering or selling of a reverse mortgage loan. [Civil Code,
Section 1923.2].
5)Provides that no lender may take a reverse mortgage loan
application from a prospective borrower unless the lender
provides that prospective borrower, prior to his or her
meeting with a counseling agency, with a written checklist.
If the prospective borrower seeks counseling before requesting
a reverse mortgage loan application from a lender, the
counseling agency must provide the written checklist to the
prospective borrower. The checklist must conspicuously alert
the prospective borrower, in 12-point type or larger, that he
or she should discuss the following issues with the counselor:
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a) How unexpected medical or other events that may require
the prospective borrower to move out of the home earlier
than anticipated, either permanently or for more than one
year, may 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, such as a less costly home equity line of credit,
property tax deferral program, or governmental aid program;
c) Whether the prospective borrower intends to use the
proceeds of the reverse mortgage to purchase an annuity or
other insurance product, 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 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 registry, after the borrower's equity is
depleted. [Civil Code, Section 1923.5].
6)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,
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c) The loan is made by a lender licensed or chartered
pursuant to California or federal law.
7)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]:
8)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.
9)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.
10)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].
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11)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].
12)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.].
13)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].
14)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 :
Last year, this committee passed and the Governor signed AB 329
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(Feuer) which established greater consumer protections and
requirement for reverse mortgage transactions. AB 329
established restrictions on the cross-selling of insurance
products relating to the reverse mortgage and required reverse
mortgage lenders to maintain procedural safeguards against
cross-selling of products in general. Additionally, the bill
prohibited HUD-certified counseling agencies from receiving
compensation from the lender making the reverse mortgage
transaction. Finally, AB 329 requires that reverse mortgage
borrowers receive a checklist from a HUD-certified counselor
that outlines the problems and pitfalls associated with reverse
mortgages.
The vast majority of reverse mortgages originated at the present
time are so-called Home Equity Conversion Mortgage (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. 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 nine percent, and a home qualifying for
$100,000, a 65-year-old could borrow up to 34 percent of the
home's value; a 75-year-old could borrow up to 47 percent of the
home's value; and, an 85-year-old could borrow up to 64 percent
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.
A variety of homes are eligible, 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
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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, which consists of 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 two percentage points per
year, and by no more than five 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.
When a senior borrower sells his home or no longer uses it as
their 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 remaining equity in the
home, if any, belongs to the borrower or his or her heirs. None
of a borrower's other assets are affected by the FHA-insured
reverse mortgage.
HECM loans also include several fees, including an origination
fee, closing costs, mortgage insurance premiums, interest, and
servicing fees.
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A HECM loan must be repaid in full when the borrower dies or
sells the home. The loan also becomes due and payable in any of
the following circumstances: 1) the borrower does not pay
property taxes or hazard insurance; 2) the borrower permanently
moves to a new principal residence; 3) 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
4) the borrower allows the property to deteriorate, and does not
make necessary repairs.
This bill was previously heard in Assembly Banking and Finance
committee on July 6, 2009. At that time the bill included a
requirement that the originator of the reverse mortgage owes the
borrower the duty of good faith, honesty and fair dealing. The
July 6, 2009 version did not include a list of those things that
would violate those duties. Additionally, the bill was passed
from committee with an amendment to clarify that the duty of
honesty, good faith and fair dealing is fulfilled when the
originator of the reverse mortgage complies with provisions of
current law. This last provision is no longer in the bill, and
instead, the bill outlines activities that would violate the
aforementioned duties.
Clarification of Existing Fiduciary Duties .
Typically, courts have found that fiduciary duty includes the
duty of good faith, honesty and fair dealing. This is not to
say that the reverse is true, in that the existence of these
duties creates a fiduciary duty, but the ongoing confusion is
sufficient enough to warrant some background on the existence of
fiduciary duty in the mortgage industry.
During witness testimony at the June 29th, 2010 hearing of this
bill it appeared there were some misunderstandings in regard to
the existing fiduciary duties of mortgage brokers in relation to
reverse mortgages. Specifically, it was the contention of one
witness that in Wyatt v. Union Mortgage Co., (924 Cal. 3d 773,
598 P.2d 45, 157 Cal. Rptr. 392 (1979)) the court concluded that
in a forward mortgage transaction fiduciary duties are present,
and according to the witness testimony at the committee June
29th, 2010 hearing, SB 660 was simply applying the duties of
good faith, fair dealing and honesty (attributes of fiduciary
duty) to reverse mortgage transactions. In fact, the fiduciary
duty of mortgage brokers is present, not due to the
circumstances of the transaction, but based on their
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relationship to the parties in the transaction. Real estate
brokers have been and continue to be subject to fiduciary duties
for both forward mortgages and reverse mortgages. Not only is
it the agency relationship created between a borrower and broker
that creates this duty, but as the court found, the duties
stated in 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."
The court analogized the obligation of the mortgage brokers to
that of insurance agents noting that individuals justifiably
rely on agents' advice because of the volume and technical
nature of the documents. The court concluded:
There is a second reason why appellants breached their
fiduciary obligations toward
respondents. In the context of insurance policies, this court
has recognized that a
fiduciary's duty may extend beyond bare written disclosure of
the terms of a transaction to
duties of oral disclosure and counseling? The reason in these
cases applies to
transactions with mortgage loan brokers as well?Against such a
backdrop, the broker's
failure to disclosure orally the true rate of interest, the
penalty for late payment of the
swollen size of the balloon payment clearly consisted a breach
of broker's fiduciary
obligations.
In the spring, 2008 issue of the DRE published Real Estate
Bulletin an article contained within discusses different types
of mortgage brokering. The section of interest in this
discussion is as follows:
Real estate brokers, including when they are acting as
mortgage loan brokers, are
fiduciaries of their clients. A fiduciary relationship is a
relationship involving a high
degree of trust, fidelity, integrity and confidence, and the
exercise of professional
expertise or special knowledge. Being a fiduciary imposes the
highest standard of care on the
broker and imposes duties including, but not limited to: the
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obligation to exercise
diligence and skill in representing a client, to fully and
truthfully disclose to a client all
material facts, and to exercise the utmost honesty, candor, and
unselfishness toward the
client. A real estate broker must work in the best interests of
his or her principal.
Additionally, Civil Code 2923.1 specifies that a mortgage
broker, offering mortgage brokerage services as defined, is a
fiduciary of the borrower. This provision of law was enacted
via AB 260 (Lieu), Chapter 629 statutes of 2009, to provide
clarity of existing case law.
Questions & Comments .
The revised provisions presented for analysis offer a complex
menu of prohibited acts that would constitute a breach of the
require duties on the part of reverse mortgage lenders. In
attempting to analyze this legislation, committee staff presents
the following questions for discussion:
1)Page 3, starting at line 4, the language provides that it's a
violation of the duties in the bill to originate the reverse
mortgage for a wrongful purpose or that the lender should know
or should have known that the reverse mortgage was likely to
be harmful to the consumer. Wrongful purpose is not defined.
How should a reverse mortgage originator determine or know
what constitutes a wrongful purpose? What would be determined
to be harmful? How is a lender supposed to know that the
mortgage will be harmful? The term "harm" is not given any
context. Harmful in what way (s)?
2)What has occurred in the reverse mortgage market that makes
the delineation of these standards necessary? Are the
recently passed provisions of AB 329 (Feurer) insufficient?
3)On page 3 starting at line 23, the bill provides that it is a
further violation of the required duty of good faith if the
transaction is divided into separate parts for purpose and
with the intent of evading the provisions [of the bill]
including but not limited to, using the proceeds of the
reverse mortgage to fund an annuity, insurance, or investment
product within one year from origination of the reverse
mortgage. This provision appears to contain two competing and
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potentially contradictory concepts. First, it provides that
the duty of good faith is violated if the lender attempts to
divide the transaction for purpose of evading the provisions
of the bill, then it provides that using the proceeds of the
reverse mortgage for certain products equals an attempt to
divide the transaction. This presents a conflict, in that it
attempts to meld together two concepts that are separated by
time. Dividing the transaction would appear to be an attempt
to alter the transaction on the front-end, prior to the
finalization of the contract, but yet it includes things that
would only occur after the fact, such as using the funds from
the transaction to purchase other products within one year.
It also appears to be constructed in such a way as to hold the
lender liable for evading the law if at some point within a
year, the reverse mortgage borrower purchases an investment
product (which is not defined) without any clear consideration
of linkages between the lender and the borrowers subsequent
purchase of other products.
4)Page 3, line 15 provides that it is a violation of the good
faith duty to originate a reverse mortgage if the lender
knows or should know that the reverse mortgage will be used as
a tool of financial abuse, as defined under current law.
Current law under Welfare and Institutions Code, Section
15610.30 provides for those circumstances with financial abuse
of an elder takes place. Based on the broad construction of
the elder financial abuse statute, could the actions
prohibited under SB 660 already constitute elder financial
abuse, and the use of "undue influence" as defined in Civil
Code 1575. Due to the compressed timeline the committee has
had to analyze this bill, staff only raises this as a question
and does not contend to draw conclusions regarding this
question.
5)Finally, when this committee last heard the bill, support of
the committee was contingent upon the adoption of an amendment
that stated in the August 20, 2009 version of the bill on page
2, line 8, "Compliance with this chapter and all other
applicable law may be cited as evidence demonstrating
compliance with the duties of this subdivision." This
provision was deleted after the latest round of amendments.
Related Legislation
1)AB 329 (Feuer), Chapter 236, Statutes of 2009: Contains the
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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.
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
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 :
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Support
Aging Services of California
California Advocates for Nursing Home Reform
Opposition
California Bankers Association
California Financial Services Association
California Independent Bankers
California Mortgage Bankers Association
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081