Amended in Assembly April 22, 2013

California Legislature—2013–14 Regular Session

Assembly Bill No. 553

Introduced by Assembly Member Medina

February 20, 2013

An act to begin delete add Section 1923.52 to end delete begin insert amend Sections 1923.2 and 1923.5 of end insert the Civil Code, relating to reverse mortgages.

LEGISLATIVE COUNSEL’S DIGEST

AB 553, as amended, 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 begin delete 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. end delete begin insert or assessing any fees until seven days from the date of loan counseling, as specified. The bill would make specified changes to the disclosure notice. end insert The bill would begin delete also end delete begin insert delete the requirement that the lender provide a written checklist and would, instead, end insert prohibit a lender from taking a reverse mortgage application unless begin delete at least 7 days prior to receiving counseling end delete the applicant has received from the lender a specified begin delete “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. end delete begin insert reverse mortgage worksheet guide. end insert The begin insert bill would require that the end insert worksheet begin delete would end delete contain certain begin delete questions end delete begin insert issues end insert that the borrower is advised to consider and begin delete bring to his or her reverse mortgage counseling session. end delete begin insert discuss with the counselor. The bill would require the counselor and the prospective borrower to sign the worksheet, as specified. end insert

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 begin delete 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. end delete
begin insert and discuss with an HUD-approved reverse mortgage counselor
the items in the reverse mortgage worksheet guide specified in
subdivision (b) of Section 1923.5 of the Civil Code. end insert

(c)  begin delete 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, end delete begin insert In specifying these
requirements, end insert it is not the intent of the Legislature to discourage
the use of reverse mortgages, which often provide substantial
benefits to senior citizens. Rather, begin delete anticipating the continued rapid
growth in the reverse mortgage market, the Reverse Mortgage
Elder Protection Act of 2013 seeks end delete begin insert these requirements seek end insert 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 begin delete a sometimes
vulnerable population. end delete begin insert reverse mortgage loan borrowers. end insert

begin delete

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

end delete

begin insert

begin insert SEC. 2. end insert   

end insert

begin insert Section 1923.2 of the end insert begin insert Civil Code end insert begin insert is amended to read: end insert

1923.2.  

A reverse mortgage loan shall comply with all of the
following requirements:

(a) Prepayment, in whole or in part, shall be permitted without
penalty at any time during the term of the reverse mortgage loan.
For the purposes of this section, penalty does not include any fees,
payments, or other charges that would have otherwise been due
upon the reverse mortgage being due and payable.

(b) A reverse mortgage loan may provide for a fixed or
adjustable interest rate or combination thereof, including compound
interest, and may also provide for interest that is contingent on the
value of the property upon execution of the loan or at maturity, or
on changes in value between closing and maturity.

(c) A reverse mortgage may include costs and fees that are
charged by the lender, or the lender’s designee, originator, or
servicer, including costs and fees charged upon execution of the
loan, on a periodic basis, or upon maturity.

(d) If a reverse mortgage loan provides for periodic advances
to a borrower, these advances shall not be reduced in amount or
number based on any adjustment in the interest rate.

(e) A lender who fails to make loan advances as required in the
loan documents, and fails to cure an actual default after notice as
specified in the loan documents, shall forfeit to the borrower treble
the amount wrongfully withheld plus interest at the legal rate.

(f) The reverse mortgage loan may become due and payable
upon the occurrence of any one of the following events:

(1) The home securing the loan is sold or title to the home is
otherwise transferred.

(2) All borrowers cease occupying the home as a principal
residence, except as provided in subdivision (g).

(3) Any fixed maturity date agreed to by the lender and the
borrower occurs.

(4) An event occurs which is specified in the loan documents
and which jeopardizes the lender’s security.

(g) Repayment of the reverse mortgage loan shall be subject to
the following additional conditions:

(1) Temporary absences from the home not exceeding 60
consecutive days shall not cause the mortgage to become due and
payable.

(2) Extended absences from the home exceeding 60 consecutive
days, but less than one year, shall not cause the mortgage to become
due and payable if the borrower has taken prior action which
secures and protects the home in a manner satisfactory to the
lender, as specified in the loan documents.

(3) The lender’s right to collect reverse mortgage loan proceeds
shall be subject to the applicable statute of limitations for written
loan contracts. Notwithstanding any other provision of law, the
statute of limitations shall commence on the date that the reverse
mortgage loan becomes due and payable as provided in the loan
agreement.

(4) The lender shall 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 and payable, and that ends when repayment in full is made.

(h) The first page of any deed of trust securing a reverse
mortgage loan shall contain the following statement in 10-point
boldface type: “This deed of trust secures a reverse mortgage loan.”

(i) A lender or any other person that participates in the
origination of the mortgage shall not require an applicant for a
reverse mortgage to purchase an annuity as a condition of obtaining
a reverse mortgage loan.

(1) The lender or any other person that participates in the
origination of the mortgage shall not do 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 procedural 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.

(B) Refer the borrower to anyone for the purchase of an annuity
or other financial or insurance product prior to the closing of the
reverse mortgage or before the expiration of the right of the
borrower to rescind the reverse mortgage agreement.

(2) This subdivision does not prevent a lender from offering or
referring borrowers for title insurance, hazard, flood, or other peril
insurance, or other similar products that are customary and normal
under a reverse mortgage loan.

(3) A lender or any other person who participates in the
origination of a reverse mortgage loan to which this subdivision
would apply, and who complies with paragraph (1) of subsection
(n), and with subsection (o), of Section 1715z-20 of Title 12 of
the United States Code, and any regulations and guidance
promulgated under that section, as amended from time to time, in
offering the loan, regardless of whether the loan is originated
pursuant to the program authorized under Section 1715z-20 of
Title 12 of the United States Code, and any regulations and
guidance promulgated under that section, shall be deemed to have
complied with this subdivision.

(j) 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 to
engage in reverse mortgage counseling as provided in Subpart B
of Part 214 of Title 24 of the Code of Federal Regulation. The
counseling agency shall not receive 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 or insurance product. This subdivision does not
prevent a counseling agency from receiving financial assistance
that is unrelated to the offering or selling of a reverse mortgage
loan and that is provided by the lender as part of charitable or
philanthropic activities.

(k) A lender shall not accept a final and complete application
for a reverse mortgage loan from a prospective applicant or assess
any fees upon a prospective applicant begin insert until the elapse of seven
days from the date of counseling as evidenced by the counseling
certification and end insert without first receiving certification from the
applicant or the applicant’s authorized representative that the
applicant has received counseling from an agency as described in
subdivision (j) and that the counseling was conducted in person,
unless the certification specifies that the applicant elected to receive
the counseling in a manner other than in person. The certification
shall be signed by the borrower and the agency counselor, and
shall include the date of the counseling and the name, address, and
telephone number of both the counselor and the applicant.
Electronic facsimile copy of the housing counseling certification
satisfies the requirements of this subdivision. The lender shall
maintain the certification in an accurate, reproducible, and
accessible format for the term of the reverse mortgage.

(l) A lender shall not make a reverse mortgage loan without
first complying with, or in the case of brokered loans ensuring
compliance with, the requirements of Section 1632, if applicable.

begin insert

begin insert SEC. 3. end insert   

end insert

begin insert Section 1923.5 of the end insert begin insert Civil Code end insert begin insert is amended to read: end insert

1923.5.  

(a) No reverse mortgage loan application shall be
taken by a lender unless the loan applicant, prior to receiving
counseling, has received from the lender the following plain
language statement in conspicuous 16-point type or larger, advising
the prospective borrower about counseling prior to obtaining the
reverse mortgage loan:

IMPORTANT NOTICE
TO REVERSE MORTGAGE LOAN APPLICANT

A REVERSE MORTGAGE IS A COMPLEX FINANCIAL
TRANSACTION. 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
TERMS OF THE REVERSE MORTGAGE AND ITS EFFECT
begin insert ON YOUR IMMEDIATE FUTURE NEEDS end insert . BEFORE ENTERING
INTO THIS TRANSACTION, YOU ARE REQUIRED TO
CONSULT WITH AN INDEPENDENT begin insert REVERSE MORTGAGE end insert
LOAN COUNSELOR begin insert TO DISCUSS WHETHER OR NOT A
REVERSE MORTGAGE IS SUITABLE FOR YOU end insert . A LIST OF
APPROVED COUNSELORS WILL BE PROVIDED TO YOU
BY THE LENDER.

SENIOR CITIZEN ADVOCACY GROUPS ADVISE AGAINST
USING THE PROCEEDS OF A REVERSE MORTGAGE TO
PURCHASE AN ANNUITY OR RELATED FINANCIAL
PRODUCTS. IF YOU ARE CONSIDERING USING YOUR
PROCEEDS FOR THIS PURPOSE, YOU SHOULD DISCUSS
THE FINANCIAL IMPLICATIONS OF DOING SO WITH
YOUR COUNSELOR AND FAMILY MEMBERS.

(b) (1) 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,
prior to his or her meeting with a counseling agency on reverse
mortgages, with a begin delete written checklist, or in the event that the
prospective borrower seeks counseling prior to requesting a reverse
mortgage loan application from the reverse mortgage lender, the
counseling agency shall provide the prospective borrower with a
written checklist. end delete begin insert reverse mortgage worksheet guide. end insert The begin delete written
checklist end delete begin insert reverse mortgage worksheet guide end insert shall conspicuously
alert the prospective borrower, in 12-point type or larger, that he
or she should discuss with the agency counselor the following
issues:

(A) How unexpected medical or other events that cause the
prospective borrower to move out of the home, either permanently
or for more than one year, earlier than anticipated will 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, 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 the loan on nonborrowing
residents of the home after all borrowers have died or permanently
left begin delete the home. end delete begin insert and that a 12 end insert begin insert -consecutive month absence by the
borrower will cause the reverse mortgage loan to become due. end insert

begin delete

(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.

end delete begin insert

(E) Reverse mortgages require three continuous obligations of
the borrower: maintenance and repair of the home, payment of
property taxes, and payment of property insurance premiums. A
failure to do any of these items could lead to default on the reverse
mortgage.

end insert

(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.

(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.

begin insert

(H) That a reverse mortgage is a compounding loan and that
the debt may accelerate over time.

end insert begin insert

(I) The risks associated with using the proceeds of a reverse
mortgage to purchase investment products.

end insert

(2) The begin delete checklist end delete begin insert reverse mortgage worksheet guide end insert required
in paragraph (1) shall be signed by the agency counselor, if the
counseling is done in person, and by the prospective borrower and
returned to the lender along with the certification of counseling
required under subdivision (k) of Section 1923.2, and the loan
application shall not be approved until the signed begin delete checklist end delete begin insert reverse
mortgage worksheet guide end insert is provided to the lender. A copy of the
begin delete checklist end delete begin insert reverse mortgage worksheet guide end insert shall be provided to
the borrower.