BILL NUMBER: AB 1700 ENROLLED
BILL TEXT
PASSED THE SENATE AUGUST 13, 2014
PASSED THE ASSEMBLY AUGUST 18, 2014
AMENDED IN SENATE AUGUST 7, 2014
AMENDED IN SENATE JUNE 10, 2014
AMENDED IN ASSEMBLY APRIL 9, 2014
INTRODUCED BY Assembly Member Medina
(Coauthor: Senator Correa)
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, 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 7 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 reverse mortgage
worksheet guide 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 reverse
mortgage worksheet guide, as specified.
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 can
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 lapse 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 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 RIGHT 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 language 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 the
following plain language reverse mortgage worksheet guide in
14-point type or larger:
Reverse Mortgage Worksheet Guide--Is a Reverse Mortgage Right for
Me?
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.
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, who can help you understand what it means
for you 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 may become 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. To
determine if this is an issue for you, ask yourself:
(A) Who is currently living in the home with you?
(B) What will they do when you die or permanently move from the
home?
(C) Have you discussed this with all those living with you or any
family members?
(D) Who will pay off the loan, and have you discussed this with
them?
(E) 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? To determine if
this is an issue for you, ask yourself:
(A) Are you contemplating a lump-sum withdrawal?
(B) What other resources will you have once you have reached your
equity withdrawal limit?
(C) Will you have funds to pay for unexpected medical expenses?
(D) Will you have the ability to finance alternative living
accommodations, such as independent living, assisted living, or a
long-term care nursing home?
(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?
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-interest loans,
and the debt to the lender increases 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:
(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.
(B) 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.
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 increasing debt incurred
by reverse mortgage borrowers, using home equity to finance
investments is not suitable in most instances. To determine if this
is an issue for you, consider:
(A) The cost of the reverse mortgage loan may exceed any financial
gain from any product purchased.
(B) Will the financial product you are considering freeze or
otherwise tie up your money?
(C) There may be high surrender fees, service charges, or
undisclosed costs on the financial products purchased with the
proceeds of a reverse mortgage.
(D) Has the sales agent offering the financial product discussed
suitability with you?
Do you need to discuss this with your counselor? Yes or No
5. Do you know that a reverse mortgage may impact 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. To determine if this is an issue for
you, consider:
(A) There are state and federal taxes on the income investments
financed through home equity.
(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.
(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.
Do you need to discuss this with your counselor? Yes or No
(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 reverse mortgage worksheet guide is
provided to the lender. A copy of the reverse mortgage worksheet
guide shall be provided to the borrower.