BILL ANALYSIS Ó
AB 1700
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ASSEMBLY THIRD READING
AB 1700 (Medina)
As Amended April 9, 2014
Majority vote
BANKING & FINANCE 11-1
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|Ayes:|Dickinson, Achadjian, |
| |Bonta, Chau, Gatto, |
| |Harkey, Linder, Perea, |
| |Rodriguez, Weber, |
| |Williams |
| | |
|-----+--------------------------|
|Nays:|Allen |
| | |
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SUMMARY : Prohibits a reverse mortgage lender from accepting a
reverse mortgage application until seven days have passed from
the date of mandatory loan counseling. Specifically, this bill
deletes the current requirement that the lender provides the
borrower with a specific checklist prior to counseling, and
instead provides a reverse mortgage worksheet guide in at least
14-point font.
EXISTING LAW :
1)Requires a reverse mortgage to comply with the following
requirements (Civil Code Section 1923.2):
a) Prepayment, without penalty, must be allowed at any
time;
b) The reverse mortgage may become payable and due under
certain circumstances;
c) The lender must 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;
d) A lender or any other person that participates in the
origination of the mortgage shall not require the applicant
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to also purchase an annuity;
e) Prohibits the lender from participating in, or be
associated with any other financial or insurance activity,
unless the lender maintains procedural safeguards that
ensure that the originator of the reverse mortgage has no
involvement, or incentive to provide the borrower with any
other financial or insurance product;
f) Prohibits the lender from referring the borrower to
anyone for purchase of annuity or other financial product;
g) The lender must provide a prospective borrower with a
list of not fewer than 10 United States Department of
Housing and Urban Development (HUD) certified counseling
agencies; and,
h) Provides that the lender shall not accept a final and
complete application for a reverse mortgage from the
prospective applicant unless they first receive from the
applicant certification that they have received counseling
from a HUD certified counseling agency.
2)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
font, 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. BEFORE ENTERING INTO THIS
TRANSACTION, YOU ARE REQUIRED TO CONSULT WITH AN INDEPENDENT
LOAN COUNSELOR. 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
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DISCUSS THE FINANCIAL IMPLICATIONS OF DOING SO WITH YOUR
COUNSELOR AND FAMILY MEMBERS.
3)Pursuant to Civil Code Section 1923.5 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 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. The written checklist shall conspicuously alert
the prospective borrower, in 12-point font 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 non-borrowing
residents of the home after all borrowers have died or
permanently left the home;
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;
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
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equity in the home will have on the borrower's estate and
heirs; and,
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.
4)The checklist required in 1) above 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 Civil Code Section 1923.2, and the loan application shall
not be approved until the signed checklist is provided to the
lender. A copy of the checklist shall be provided to the
borrower.
FISCAL EFFECT : None
COMMENTS : The key component of this bill are the requirements
that a borrower must wait seven days from the day of counseling
prior to turning in a final reverse mortgage loan application,
and that the lender must provide the borrower with a reverse
mortgage worksheet guide that is designed to address the various
responsibilities and consequences of a reverse mortgage. The
justification for this seven day cooling off period is to give
time to the potential borrower to consider the issues that are
discussed during counseling and highlighted in the worksheet
prior to entering into the complexities of a reverse mortgage.
The vast majority of reverse mortgages are insured by the
Federal Housing Administration (FHA) as part of its Home Equity
Conversion Mortgage (HECM) program. The FHA insurance
guarantees that borrowers will be able to access their
authorized loan funds in the future (subject to the terms of the
loan), even if the loan balance exceeds the value of the home or
if the lender experiences financial difficulty. Lenders are
guaranteed that they will be repaid in full when the home is
sold, regardless of the loan balance or home value at repayment.
Borrowers or their estates are not liable for loan balances
that exceed the value of the home at repayment - FHA
insurance covers this risk.
Today, the market for reverse mortgages is very small. Only
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about 2% to 3% of eligible homeowners choose to take out a
reverse mortgage. Only about 582,000 HECM loans are outstanding
as of November 2011, as compared to more than 50 million
traditional mortgages and more than 17 million home equity loans
and lines of credit. But reverse mortgages have the potential
to become a much more prominent part of the financial landscape
in the coming decades. In 2008, the first baby boomers became
eligible for reverse mortgages. The baby boom generation (48-
to 66-year-olds in 2012) includes more than 43 million
households, of which about 32 million are homeowners. As of
2009, the median home equity for baby boomer households was
$108,000. Many boomers may find that they will need to use
their home equity in order to maintain the lifestyle they expect
to have in retirement.
Many of the original product design concepts for the HECM
program were developed during the 1980s by private companies
offering proprietary (non-government insured) reverse mortgages
of various types. Throughout the 1990s, when the HECM program
was still a small pilot, and again in the mid-2000s, in the
midst of the housing boom, a range of proprietary products were
available in the marketplace. For most consumers, however, the
HECM offered a better value. Today, only one lender offers a
proprietary product, which accounts for only a handful of loans
per year.
The HECM program determines how much can be borrowed based on
the value of the home, prevailing interest rates, and the age of
the borrower (or youngest co-borrower). The loans require no
monthly mortgage payments. Interest and fees are added to the
principal balance each month, resulting in a rising loan balance
over time. Borrowers may remain in the home indefinitely, even
if the loan balance becomes greater than the value of the home -
so long as the borrower meets certain conditions. In return for
this protection, and protection against the possibility that
their lender fails to make loan disbursements as agreed,
borrowers pay a mortgage insurance premium (MIP) to FHA.
HECM borrowers have several options as to the structure of the
MIP, the interest rate type (fixed or adjustable), and the way
that they receive their loan proceeds. The range of options has
increased in recent years, adding to the difficulty of the
choices that prospective borrowers have to make around what is
already a complex product. Prospective borrowers are required
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to attend mandatory pre-loan counseling, but the counseling may
not be sufficient to fully equip prospective borrowers to make
good decisions.
A majority of reverse mortgage borrowers report satisfaction
with the product. A 2006 AARP survey found that the product
completely met their needs (58%) or mostly met their needs
(25%). Additionally, 79% of respondents said that the reverse
mortgage helped them stay in their home, and 87% said it
improved their quality of life. Over the last decade more
borrowers take more cash up front than in years previous. By
2008, the median borrower was taking out 88% of loan proceeds
within the first year.
REPORT OF CONSUMER FINANCIAL PROTECTION BUREAU (CFPB): KEY
FINDINGS
CFPB produced a comprehensive report on reverse mortgages on
June 28, 2012. CFPB, under Dodd-Frank, took responsibility from
the Federal Reserve on crafting further regulations for reverse
mortgages. CFPB has said that they will use the report to craft
upcoming regulations. CFPB is planning a project to "improve
and integrate" disclosure requirements under the Truth in
Lending Act and Real Estate Settlement Procedures Act
specifically related to reverse mortgages. To that end, the
agency said, the CFPB will consider measures the Federal Reserve
Board had proposed in 2010 - before Dodd-Frank transferred
consumer policy to the bureau. That proposal would have imposed
limits on misleading advertising by reverse mortgage providers,
and strengthened restrictions related to cross-selling of
reverse mortgage products.
1)Reverse mortgages are complex products and difficult for
consumers to understand.
a) Lessons learned from the traditional mortgage market do
not always serve consumers well in the reverse mortgage
market. The rising balance, falling equity nature of
reverse mortgages is particularly difficult for consumers
to grasp;
b) Recent innovation and policy changes have created more
choices for consumers, including options with lower upfront
costs. However, these changes have also increased the
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complexity of the choices and tradeoffs consumers have to
make; and,
c) The tools - including federally required disclosures -
available to consumers to help them understand prices and
risks are insufficient to ensure that consumers are making
good tradeoffs and decisions.
2)Reverse mortgage borrowers are using the loans in different
ways than in the past, which increase risks to consumers.
a) Reverse mortgage borrowers are taking out loans at
younger ages than in the past. In fiscal year (FY) 2011,
nearly half of borrowers were under age 70;
b) Taking out a reverse mortgage early in retirement, or
even before reaching retirement, increases risks to
consumers. By tapping their home equity early, these
borrowers may find themselves without the financial
resources to finance a future move - whether due to health
or other reasons;
c) Reverse mortgage borrowers are withdrawing more of their
money upfront than in the past. In FY 2011, 73% of
borrowers took all or almost all of their available funds
upfront at closing. This proportion has increased by 30
percentage points since 2008. Borrowers who withdraw all
of their available home equity upfront will have fewer
resources to draw upon to pay for everyday and major
expenses later in life. Borrowers who take all of their
money upfront are also at greater risk of becoming
delinquent on taxes and/or insurance and ultimately losing
their homes to foreclosure;
d) Fixed-rate, lump-sum loans now account for about 70% of
the market. The availability of this product may encourage
some borrowers to take out all of their funds upfront even
though they do not have an immediate need for the funds.
In addition to having fewer resources to draw upon later in
life, these borrowers face other increased risks.
Borrowers who save or invest the proceeds may be earning
less on the savings than they are paying in interest on the
loan, or they may be exposing their savings to risky
investment choices. These borrowers also face increased
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risks of being targeted for fraud or other scams; and,
e) Reverse mortgage borrowers appear to be increasingly
using their loans as a method of refinancing traditional
mortgages rather than as a way to pay for everyday or major
expenses. Some borrowers may simply be prolonging an
unsustainable financial situation.
3)Product features, market dynamics, and industry practices also
create risks for consumers.
a) A surprisingly large proportion of reverse mortgage
borrowers (9.4%) are at risk of foreclosure due to
nonpayment of taxes and insurance. This proportion is
continuing to increase;
b) Misleading advertising remains a problem in the industry
and increases risks to consumers. This advertising
contributes to consumer misperceptions about reverse
mortgages, increasing the likelihood of poor consumer
decision-making;
c) Spouses of reverse mortgage borrowers who are not
themselves named as co-borrowers are often unaware that
they are at risk of losing their homes. If the borrowing
spouse dies or needs to move, the non-borrowing spouse must
sell the home or otherwise pay off the reverse mortgage at
that time. Other family members (children, grandchildren,
etc.) who live with reverse mortgage borrowers are also at
risk of needing to find other living arrangements when the
borrower dies or needs to move; and,
d) The reverse mortgage market is increasingly dominated by
small originators, most of which are not depository
institutions. The changing economic and regulatory
landscape faced by these small originators creates new
risks for consumers.
4)Counseling, while designed to help consumers understand the
risks associated with reverse mortgages, needs improvement in
order to be able to meet these challenges.
a) Reverse mortgages are inherently complicated, and the
new array of product choices makes the counselor's job much
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more difficult. Counselors need improved methods to help
consumers better understand the complex tradeoffs they face
in deciding whether to get a reverse mortgage;
b) Funding for housing counseling is under pressure, making
access to high-quality counseling more difficult. Some
counselors may frequently omit some of the required
information or speed through the material;
c) Some counseling agencies only receive payment if and
when the reverse mortgage is closed (the counseling fee is
paid with loan proceeds), which could undermine counselors'
impartiality;
d) Some borrowers may not take the counseling sessions
seriously. Additional consumer awareness and education may
be necessary;
e) Counseling may be insufficient to counter the effects of
misleading advertising, aggressive sales tactics, or
questionable business practices; and,
f) Stronger regulation, supervision of reverse mortgage
companies, and enforcement of existing laws may also be
necessary.
5)Some risks to consumers appear to have been adequately
addressed by regulation, but remain a matter for supervision
and enforcement, while other risks still require regulatory
attention.
a) Cross-selling, previously a top consumer protection
concern, appears to have been considerably dampened as a
result of federal legislation, though some risks remain.
Strong supervision and enforcement is necessary to ensure
that industry participants abide by existing laws;
b) The risk of fraud and other scams is heightened for this
population. Vigorous enforcement is necessary to ensure
that older homeowners are not defrauded of a lifetime of
home equity;
c) Special disclosures are required for reverse mortgages,
but existing disclosures are quite difficult for consumers
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to understand; and,
d) There are general prohibitions against deceptive
advertising, but there are no specific federal rules
governing deceptive advertising with respect to reverse
mortgages.
On October 14, 2012, The New York Times reported, A Risky
Lifeline for Elderly is Costing Some Their Homes, on the growing
risks of reverse mortgages as the market has become flooded with
small brokers, including former subprime lenders. The article
highlighted many of the same issues found in the CFPB report.
For example, seniors not understanding the risks associated with
the product such as fees, mandatory upkeep of property taxes and
maintenance. Additionally, they highlighted how some seniors
were encouraged to make their older spouses the sole borrower on
the loan, which can earn brokers larger fees if the older spouse
is the only borrower. The jeopardy in this approach is that if
the sole borrower dies, the non-borrower occupant of the
property loses all rights to stay in the home. This is a risk
that CFBP found was often not highlighted sufficiently in the
reverse mortgage counseling process.
Previous legislation: AB 329 (Feuer), Chapter 236, Statutes of
2009, provided that a lender or any other person that
participates in the origination of a reverse mortgage shall not
participate in, or be associated with, or employ any party that
participates in or is associated with any other financial or
insurance activity, unless the lender maintains certain
safeguards or refer prospective borrowers to anyone for purchase
of financial or insurance products.
AB 553 (Medina) of 2013, was very similar to this bill except
that it required that the potential borrower not receive
counseling until at least seven days elapsed since their contact
with the lender. AB 553 died in the Assembly Banking and
Finance Committee, pursuant to Article IV, Section 10(c) of the
California Constitution.
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Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0003197