California Legislature—2013–14 Regular Session

Assembly Bill No. 1700

Introduced by Assembly Member Medina

February 13, 2014

An act to amend Sections 1923.2 and 1923.5 of the Civil Code, relating to reverse mortgages.

LEGISLATIVE COUNSEL’S DIGEST

AB 1700, 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 final 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 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. The bill would delete the requirement that the lender provide a written checklist and would, instead, prohibit a lender from taking a reverse mortgage application unless the applicant has received from the lender a specified reverse mortgage worksheet guide. The bill would require that the worksheet contain certain issues that the borrower is advised to consider and discuss with the counselor. The bill would require the counselor and the prospective borrower to sign the worksheet, as specified.

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.  

(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 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.

(c) In specifying these requirements, it is not the intent of the
Legislature to discourage the use of reverse mortgages, which
often provide substantial benefits to senior citizens. Rather, these
requirements seek 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
reverse mortgage loan borrowers.

SEC. 2.  

Section 1923.2 of the Civil Code is amended to read:

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.

SEC. 3.  

Section 1923.5 of the Civil Code is amended to read:

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 end delete begin insert reverse mortgage worksheet
guide end insert , 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 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 end insert begin insert that a 12-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 things 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 checklist is
provided to the lender. A copy of the begin delete checklist end delete begin insert end insert begin insert reverse mortgage
worksheet guide end insert shall be provided to the borrower.