BILL ANALYSIS Ó
AB 2010
Page 1
ASSEMBLY THIRD READING
AB 2010 (Bonilla)
As Amended April 23, 2012
Majority vote
BANKING & FINANCE 11-0
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|Ayes:|Eng, Achadjian, Charles |
| |Calderon, Fuentes, Gatto, |
| |Harkey, |
| |Roger Hernández, Lara, |
| |Morrell, Perea, Torres |
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SUMMARY : Prohibits a reverse mortgage lender from accepting a
complete and final application for a reverse mortgage unless the
applicant has completed in-person counseling, or the
counseling certification specifies that the applicant elected to
receive counseling in a manner other than in-person.
EXISTING STATE LAW :
1)Defines "reverse mortgage" as a non-recourse loan secured by
real property that meets all of the following criteria:
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 the laws of this state or the United States.
(Civil Code, Section 1923)
2)Requires a reverse mortgage to comply with the following
requirements (Civil Code Section 1923.2):
a) Prepayment, without penalty, must be allowed at any
time;
b) The reverse mortgage may become payable and due under
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certain circumstances;
c) The lender must prominently disclose in the loan
agreement any interest rate or other fees to be charged
during the period that commences on the date that the
reverse mortgage loan becomes due;
d) A lender or any other person that participates in the
origination of the mortgage shall not require the applicant
to also purchase an annuity;
e) Prohibits the lender from participating in, or be
associated with any other financial or insurance activity,
unless the lender maintains procedural safeguards that
ensure that the originator of the reverse mortgage has no
involvement, or incentive to provide the borrower with any
other financial or insurance product;
f) Prohibits the lender from referring the borrower to
anyone for purchase of annuity or other financial product;
g) The lender must provide a prospective borrower with a
list of not fewer than 10 United States Department of
Housing and Urban Development (HUD) certified counseling
agencies; and,
h) Provides that the lender shall not accept a final and
complete application for a reverse mortgage from the
perspective applicant unless they first receive from the
applicant certification that they have received counseling
from a HUD certified counseling agency.
3)Provides penalties for "Financial Abuse" of an elder or
dependent adult, which is defined as occurring when a person
or entity does any of the following:
a) Taking, obtaining, or retaining real or personal
property of an elder or dependent adult for a wrongful use
or with intent to defraud, or both;
b) Assisting in taking, obtaining or retaining real or
personal property of an elder or dependent adult for a
wrongful use or with intent to defraud, or both; or,
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c) Taking, obtaining, or retaining, or assisting in taking,
obtaining, or retaining real or personal property of an
elder or dependent adult by undue influence. (Welfare and
Institutions Code Section 15610.30)
EXISTING FEDERAL LAW :
1)Establishes, within 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 the 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. Required any prospective heir to satisfy the lender's
lien before taking title to the property. (12 United States Code
(USC) Section 1715z-20 et seq.; 12 California Federal Regulation
(CFR) Section 226.33)
2)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)
3)Requires all HECM loan counselors to be approved by HUD and meet
HUD standards, as specified. Counselors must discuss, generally,
financial options other than a reverse mortgage, the financial
implications of reverse mortgages, including any tax consequences,
or the effect of the loan on eligibility for government assistance
programs. (12 USC 1715z-20; 24 CFR Section 214.103)
4)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
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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).
FISCAL EFFECT : None
COMMENTS : A reverse mortgage allows a borrower, age 62 or
older, to convert equity in their home into cash and is not paid
back until the borrower leaves the home. Amounts available
under a reverse mortgage depend on amount of equity in the home,
as well as, the age of the borrower. An older borrower would
receive more cash proceeds than a younger borrower in the same
circumstances, as loan proceeds reflect the remaining life
expectancy of the borrower.
At least 95% of all reverse mortgages are insured by the Federal
Housing Administration (FHA) under the HECM program, which is
sponsored by HUD. This program began in 1990 but has undergone
changes in the last few years related to types of loans,
underwriting guidelines, and counseling requirements. 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. The counseling requirement for HECM mortgages make
them unique compared to private label reverse mortgages.
Existing federal law also gives the borrower the right to
rescind the mortgage agreement within three days after closing.
Non-HECM reverse mortgages only make up approximately 5% of the
reverse mortgage market. Like regular residential mortgages,
reverse mortgages are sold into the secondary market, and in the
case of HECM mortgages they are insured by FHA. The secondary
market for reverse mortgages has suffered from the same credit
downgrades and risk associated with the forward mortgage market
of the last five years. On March 8, 2012, Moody's announced the
downgrade of $5 billion in private label reverse mortgage
securities. This means that market pressures have contributed
to the reduction in non-HECM products.
HUD introduced new counseling protocols in August of 2010.
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These new standards update the guidance handbook for HECM
counselors, require counselors to provide the National Council
on Aging (NCOA) 28-page consumer booklet on reverse mortgages,
and require counselors to use NCOA Financial Interview Tool
(FIT). The revised counseling directives are contained in HUD
Handbook #7610.1, 2010. In regards to telephone versus
face-to-face counseling, the revised Handbook on pages 30-31
provides:
HUD recommends potential reverse mortgage borrowers,
particularly HECM borrowers, meet face-to-face with a
counselor and lender to discuss their unique financial
circumstances and decide what options are best for them.
Face-to-face counseling enables the counselor to assess
whether the client understands the alternative features and
reverse mortgage options and the financial implications of
a reverse mortgage on his/her household.
HUD believes that face-to-face counseling is the preferred
method of reverse mortgage counseling, however the handbook goes
on to acknowledge that face-to-face counseling may not always be
necessary or productive:
Reverse Mortgage Telephone Counseling. HUD recognizes that
many seniors prefer telephone counseling to face-to-face
counseling for a variety of reasons, including limited
mobility and health conditions. HUD allows participating
agencies to provide telephone reverse mortgage counseling
only if the agency has indicated that it will provide this
as a service option within its HUD approved housing
counseling work plan.
In addition to the methods of counseling outlined in the revised
handbook, it continues by providing a detailed list of issues
and concerns that counselors must discuss with the potential
reverse mortgage borrower, and other specific standards that
must be met by HECM counselors. HUD contemplated a detailed and
specific regime for counseling and acknowledges the importance
of face-to-face counseling, yet they did not mandate it for
every borrower. HUD identifies that "limited mobility and
health conditions" may make in-person counseling less than ideal
for all borrowers.
Related Legislation :
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AB 329 (Feuer), Chapter 236, Statutes of 2009, enhanced
previously existing counseling and cross-selling provisions and
requires lenders to provide the borrower with a checklist prior
to counseling that highlights the risks and alternatives to
reverse mortgages.
SB 660 (Wolk) of 2009, imposed on any person recommending a
reverse mortgage a "duty of honesty, good faith, and fair
dealing." The bill also set out "suitability standards" to
determine if there had been a breach of fiduciary duty and
provides a cause of action for breach. The bill failed passage
in the Assembly Banking and Finance Committee.
SB 1609 (Simitian), Chapter 202, Statutes of 2006, amended
counseling provisions of existing law to require the lender to
provide a list of at least five lenders; prohibited a lender
from making the purchase of an annuity a pre-condition of
obtaining a reverse mortgage; and required that reverse mortgage
contracts comply with existing state law requiring contracts to
be translated into a covered language if the contract was
primarily negotiated in that language.
AB 456 (Ducheny), Chapter 797, Statutes of 1997, established the
statutory scheme regulating reverse mortgages.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0003438