Amended in Assembly April 9, 2014

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 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 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 begin insert guide end insert 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 begin insert guide end insert , 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
begin delete often end delete begin insert can end insert 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 until the elapse of seven
days from the date of counseling, as evidenced by the counseling
certification, and 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
ON YOUR begin delete IMMEDIATE end delete FUTURE NEEDS. BEFORE
ENTERING INTO THIS TRANSACTION, YOU ARE
REQUIRED TO CONSULT WITH AN INDEPENDENT
REVERSE MORTGAGE LOAN COUNSELOR TO DISCUSS
WHETHER OR NOT A REVERSE MORTGAGE IS SUITABLE
FOR YOU. 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 reverse mortgage worksheet guide, 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 begin delete a written checklist reverse mortgage
worksheet guide. Thereverse end delete begin insert the following plain language reverse end insert
mortgage worksheet guide begin delete shall conspicuously alert the prospective
borrower, in 12-point end delete begin insert , in 14-point end insert type or begin delete larger, that he or she
should discuss with the agency counselor the following issues end delete
begin insert larger end insert :

begin delete

(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 that a 12-consecutive month absence by the borrower will
cause the reverse mortgage loan to become due.

(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.

(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.

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

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

end delete begin insert

Reverse Mortgage Worksheet Guide--Is a Reverse Mortgage
Right for Me?

end insert begin insert

To decide if a recommended purchase of a reverse mortgage is
right for you, consider all of your goals, needs, and available
options. This self-evaluation worksheet has five essential questions
for you to consider when deciding if a reverse mortgage is right
for you.

end insert begin insert

Directions: The State of California advises you to carefully read
and complete this worksheet, and bring it with you to your
counseling session. You may make notes on a separate piece of
paper with questions you may have about whether a reverse
mortgage is right for you. During the counseling session, you can
speak openly and confidentially with a professional reverse
mortgage counselor, independent of the lender, whose only job is
to help you understand what it means for you to become involved
with this particular loan.

end insert begin insert

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

end insert begin insert

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

end insert begin insert

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. To
determine if this is an issue for you, ask yourself:

end insert begin insert

(A) Who is currently living in the home with you?

end insert begin insert

(B) What will they do when you die or permanently move from
the home?

end insert begin insert

(C) Have you discussed this with all those living with you or
any family members?

end insert begin insert

(D) Who will pay off the loan, and have you discussed this with
them?

end insert begin insert

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

end insert begin insert

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

end insert begin insert

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

end insert begin insert

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.

end insert begin insert

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? To
determine if this is an issue for you, ask yourself:

end insert begin insert

(A) Are you contemplating a lump-sum withdrawal?

end insert begin insert

(B) What other resources will you have once you have reached
your equity withdrawal limit?

end insert begin insert

(C) Will you have funds to pay for unexpected medical expenses?

end insert begin insert

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

end insert begin insert

(E) 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?

end insert begin insert

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

end insert begin insert

3. Have you fully explored other options?

end insert begin insert

Rule: Less costly options may exist.

end insert begin insert

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. To determine
if this is an issue for you, consider:

end insert begin insert

(A) 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.

end insert begin insert

(B) 2. Other types of lending arrangements may be available
and less costly. You may be able to use your home equity to secure
loans from family members, friends, or would-be heirs.

end insert begin insert

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

end insert begin insert

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

end insert begin insert

Rule: Reverse mortgages are interest-accruing loans.

end insert begin insert

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. To determine if this
is an issue for you, consider:

end insert begin insert

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

end insert begin insert

(B) Will the financial product you are considering freeze or
otherwise tie up your money?

end insert begin insert

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

end insert begin insert

(D) Has the sales agent offering the financial product discussed
suitability with you?

end insert begin insert

(E) Has the agent given you a written suitability evaluation?

end insert begin insert

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

end insert begin insert

5. Do you know that a reverse mortgage may impact your
eligibility for government assistance programs?

end insert begin insert

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

end insert begin insert

Considerations: Converting your home equity into investments
may create nonexempt asset statuses. To determine if this is an
issue for you, consider:

end insert begin insert

(A) There are state and federal taxes on the income investments
financed through home equity.

end insert begin insert

(B) 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.

end insert begin insert

(C) If the homeowner is a Medi-Cal beneficiary, a reverse
mortgage may make it difficult to transfer ownership of the home,
thus resulting in Medi-Cal recovery.

end insert begin insert

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

end insert

(2) The reverse mortgage worksheet guide 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 reverse
mortgage worksheet guide shall be provided to the borrower.