California Legislature—2013–14 Regular Session

Assembly Bill No. 553

Introduced by Assembly Member Medina

February 20, 2013

An act to add Section 1923.52 to the Civil Code, relating to reverse mortgages.

LEGISLATIVE COUNSEL’S DIGEST

AB 553, as introduced, Medina. Reverse mortgages: notifications.

Existing state and federal law regulate the activities of financial institutions. Existing state law regulates reverse mortgage loans and requires a lender to refer a prospective borrower to a housing counseling agency, as specified, and prohibits a lender from accepting a full and complete application for a reverse mortgage loan or assessing any fees without receiving certification, as specified, that the borrower has received loan counseling. Existing law prohibits a lender from taking a reverse mortgage application before having provided an applicant a specified disclosure notice and written checklist.

This bill would prohibit a lender from taking a reverse mortgage application unless at least 7 days prior to receiving counseling the applicant has received from the lender a specified disclosure notice. The notice would indicate, among other things, that a reverse mortgage is a complex financial arrangement that may or may not be suitable for the applicant and that the applicant is required to consult with an independent loan counselor. The bill would also prohibit a lender from taking a reverse mortgage application unless at least 7 days prior to receiving counseling the applicant has received from the lender a specified “Reverse Mortgage Suitability Self-evaluation Worksheet” that would provide, among other things, that the suitability of a recommended purchase of a reverse mortgage should be determined with reference to the totality of the particular borrower’s circumstances, goals, and needs. The worksheet would contain certain questions that the borrower is advised to consider and bring to his or her reverse mortgage counseling session.

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

The Legislature finds and declares the following:

(a) A reverse mortgage is a loan that allows a homeowner to
convert home equity into tax-free cash payments. More than 90
percent of all reverse mortgages are obtained through the Home
Equity Conversion Mortgage (HECM) program sponsored by the
United States Department of Housing and Urban Development.
Many senior citizens use reverse mortgage payments to supplement
retirement income or pay medical expenses. Although the HECM
program has been in existence since 1989, the program has seen
rapid growth only in the past few years. As the population ages,
this growth rate is expected to accelerate. The growth rate is also
expected to increase as sales agents and lenders turn from the
declining subprime and conventional mortgage market to the
rapidly growing market for reverse mortgages.

(b) Because reverse mortgage decisionmaking involves a number
of complex issues, before committing to a loan every senior should
contemplate possible negative consequences. Every prospective
purchaser of a reverse mortgage should study and complete the
worksheet this act would require before attending their mandatory
HUD-approved reverse mortgage counseling session. No purchaser
should move forward in purchasing their reverse mortgage loan
unless and until he or she completes the self-evaluation and clearly
understands if a reverse mortgage is suitable for his or her needs.

(c) This act shall be known, and may be cited, as the Reverse
Mortgage Elder Protection Act of 2013. In enacting the Reverse
Mortgage Elder Protection Act of 2013, it is not the intent of the
Legislature to discourage the use of reverse mortgages, which
often provide substantial benefits to senior citizens. Rather,
anticipating the continued rapid growth in the reverse mortgage
market, the Reverse Mortgage Elder Protection Act of 2013 seeks
to ensure that senior citizens will make informed decisions and
that persons who offer, sell, or arrange the sale of reverse
mortgages to senior citizens will act in the best interest of a
sometimes vulnerable population.

SEC. 2.  

Section 1923.52 is added to the Civil Code, to read:

1923.52.  

(a) No reverse mortgage loan application shall be
taken by a lender unless the loan applicant, at least seven days
prior to receiving counseling, has received from the lender the
following plain language statement in 16-point font or larger,
advising the prospective borrower about preparing for counseling
prior to the prospective borrower’s counseling session:

IMPORTANT NOTICE TO REVERSE MORTGAGE LOAN
APPLICANT

A REVERSE MORTGAGE IS A COMPLEX FINANCIAL
TRANSACTION THAT MAY OR MAY NOT BE SUITABLE
FOR YOUR IMMEDIATE AND OR FUTURE NEEDS. IF YOU
DECIDE TO OBTAIN A REVERSE MORTGAGE LOAN, YOU
WILL SIGN BINDING LEGAL DOCUMENTS THAT WILL
HAVE IMPORTANT LEGAL AND FINANCIAL
IMPLICATIONS FOR YOU AND YOUR ESTATE. IT IS
THEREFORE IMPORTANT TO UNDERSTAND THE
IMPLICATION OF BECOMING INVOLVED IN A REVERSE
MORTGAGE LOAN AND FOR YOU TO BE PREPARED TO
DISCUSS WITH A REVERSE MORTGAGE COUNSELOR
WHETHER OR NOT A REVERSE MORTGAGE LOAN IS
SUITABLE FOR YOU. BEFORE ENTERING INTO THIS
TRANSACTION, YOU ARE REQUIRED TO CONSULT WITH
AN INDEPENDENT LOAN COUNSELOR.

(b) In addition to the plain statement notice described in
subdivision (a), no reverse mortgage loan application shall be taken
by a lender unless the lender provides the prospective borrower
with a written suitability worksheet at least seven days prior to his
or her meeting with a HUD-approved counseling agency on reverse
mortgages. The suitability worksheet shall alert the prospective
borrower, in 16-point font or larger, that he or she should discuss
suitability issues with the agency counselor. The worksheet shall
read as follows:

The State of California has determined that it is in your best
interest to review and complete this worksheet before you attend
your reverse mortgage counseling session. You are also advised
to discuss every concern you may have about suitability with your
counselor. You should not move forward with purchasing a reverse
mortgage loan unless you understand whether or not a reverse
mortgage is a suitable loan for you. Carefully read through each
of these suitability questions and make notes on a separate piece
of paper of any question or questions you may have about
suitability. Have these questions with you when you have your
reverse mortgage counseling session. The purpose of the counseling
session is for you to have an opportunity to speak openly and
candidly with a neutral professional whose sole purpose is to help
you understand what it means to become involved with this
particular loan.

Reverse Mortgage Suitability Self-evaluation Worksheet

The suitability of a recommended purchase of a reverse mortgage
should be determined, with reference to the totality of the particular
borrower’s circumstances, goals, and needs, including, but not
limited to, the following:

Directions: Carefully read through each of these suitability
questions and make notes on a separate piece of paper regarding
any question you may have about suitability. You are also advised
to bring these questions with you when you have your reverse
mortgage counseling session. The purpose of the counseling session
is for you to have an opportunity to speak openly and candidly
with a neutral professional whose sole purpose is to help you
understand what it means to become involved with this particular
loan.

1. What happens to others in your home after you die or move
out?

Rule: When the borrower dies, moves, or is absent from the
home for 12 consecutive months, the loan becomes due.

Considerations: Having a reverse mortgage affects the future of
all those living with you. If the loan cannot be paid off, then the
home will have to be sold in order to satisfy the lender.

• Who is currently living in the home with you?

• What will they do when you die or permanently move from
the home?

• Have you discussed this with all those living with you or any
family members?

• Who will pay off the loan, and have you discussed this with
them?

• If your heirs do not have enough money to pay off the loan,
the home will pass into foreclosure.

Do you need to discuss this with your counselor? Yes or No

 

2. Do you know that you can default on a reverse mortgage?

Rule: There are three continuous financial obligations. If you
fail to keep up with your insurance, property taxes, and home
maintenance, you will go into default. Uncured defaults lead to
foreclosures.

Considerations: Will you have adequate resources and income
to support your financial needs and obligations once you have
removed all of your available equity with a reverse mortgage?

• Are you contemplating a lump-sum withdrawal?

• What other resources will you have once you have reached
your equity withdrawal limit?

• Will you have funds to pay for unexpected medical expenses?

• Will you have the ability to finance alternative living
accommodations, such as independent living, assisted living, or a
long-term care nursing home?

• Will you have the ability to finance routine or catastrophic
home repairs, especially if maintenance is a factor that may
determine when the mortgage becomes payable?

Do you need to discuss this with your counselor? Yes or No

 

3. Have you fully explored other options?

Rule: Less costly options may exist.

Consideration: Reverse mortgages are compounding loans, and
the debt to the lender accelerates as time goes on. You may want
to consider using less expensive alternatives or other assets you
may have before you commit to a reverse mortgage.

• Alternative financial options for seniors may include, but not
be limited to, less costly home equity lines of credit, property tax
deferral programs, or governmental aid programs.

• With peer-to-peer lending or other contractual arrangements,
you can use your home equity to secure loans from family
members, friends, or would-be heirs.

Do you need to discuss this with your counselor? Yes or No

 

4. Are you intending to use the reverse mortgage to purchase a
financial product?

Rule: Reverse mortgages are interest-accruing loans.

Considerations: Due to the high cost and accelerating debt
incurred by reverse mortgages, using home equity to finance
investments is not suitable in most instances.

• The cost of the reverse mortgage loan may exceed any financial
gain from any product purchased.

• Will the financial product you are considering freeze or
otherwise tie up your money?

• There may be high surrender fees, service charges, or
undisclosed costs on the financial products purchased with the
proceeds of a reverse mortgage.

• Has the sales agent offering the financial product discussed
suitability with you, and has the agent given you a written
suitability evaluation?

Do you need to discuss this with your counselor? Yes or No

 

5. The impact of reverse mortgages on your eligibility for
government assistance programs.

Rule: Income received from investments will count against
individuals seeking government assistance.

Considerations: Converting your home equity into investments
may create nonexempt asset statuses.

• There are state and federal taxes on the income investments
financed through home equity.

• If you go into a nursing home for an extended period of time,
the reverse mortgage loan will become due, the home may be sold,
and any proceeds from the sale of the home may make you
ineligible for government benefits.

• If the homeowner is a Medi-Cal beneficiary, a reverse mortgage
may stymie the ability to transfer the home, thus, resulting in
Medi-Cal recovery.

Do you need to discuss this with your counselor? Yes or No