BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Noreen Evans, Chair 2013-2014 Regular Session AB 1700 (Medina) Hearing Date: June 4, 2014 As Amended: April 9, 2014 Fiscal: No Urgency: No SUMMARY Would revise the disclosure form that must be provided to prospective reverse mortgage borrowers and replace the written checklist that is currently required to be provided to prospective reverse mortgage borrowers with a written worksheet guide, whose content this bill would specify. Would prohibit a reverse mortgage lender from accepting a final and complete reverse mortgage application from a prospective reverse mortgage borrower until at least seven days have passed since that borrower received reverse mortgage counseling. DESCRIPTION 1. Would revise the disclosure statement that must be provided by a reverse mortgage lender to each prospective reverse mortgage borrower before accepting a reverse mortgage loan application from that borrower. The portion of the disclosure statement that would be changed is reproduced below, with the proposed changes shown. "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 ITSEFFECT. EFFECT ON YOUR FUTURE NEEDS. BEFORE ENTERING INTO THIS TRANSACTION, YOU ARE REQUIRED TO CONSULT WITH AN INDEPENDENTLOAN COUNSELOR. 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. 2. Would require a reverse mortgage lender, before accepting a reverse mortgage loan application from a prospective reverse mortgage borrower, to provide that borrower with a written AB 1700 (Medina), Page 2 reverse mortgage worksheet guide, in 14-point type or larger. Would provide that if a borrower seeks reverse mortgage counseling before requesting a reverse mortgage loan application from a reverse mortgage lender, the counseling agency would be required to provide the worksheet guide to the prospective borrower. 3. Would specify the wording of the reverse mortgage worksheet guide, as follows: a. The guide would inform prospective borrowers that the State of California advises them to carefully read and complete the worksheet and bring it with them to their counseling session. It would advise prospective borrowers that they may speak openly and confidentially with a professional reverse mortgage counselor that is independent of the lender, whose only job is to help them understand what it means for them to become involved with that particular loan. b. The guide would include five questions, each of which would be accompanied by a few paragraphs explaining relevant rules and considerations intended to help prospective borrowers answer those questions. Each set of questions, rules, and considerations would be followed by the question, "Do you need to discuss this with your counselor? Yes or No." The five questions would include: "What happens to others in your home after you die or move out? Do you know that you can default on a reverse mortgage? Have you fully explored other options? Are you intending to use the reverse mortgage to purchase a financial product? Do you know that a reverse mortgage may impact your eligibility for government assistance programs?" 4. Would prohibit a reverse mortgage lender from accepting a final and complete reverse mortgage loan application until at least seven days have passed from the date of counseling, as evidenced by the counseling certification. 5. Would prohibit a reverse mortgage lender from approving a reverse mortgage loan application submitted by any borrower that did not submit a reverse mortgage worksheet guide signed by that borrower and accompanied by a certification of counseling. AB 1700 (Medina), Page 3 EXISTING FEDERAL LAW AND REGULATIONS 6. Define a reverse mortgage as a nonrecourse consumer credit obligation in which a mortgage, deed of trust, or equivalent consensual security interest securing one or more advances is created in the consumer's principal dwelling, and any principal, interest, or shared appreciation or equity is due and payable (other than in the case of default) only after the consumer dies, the dwelling is transferred, or the consumer ceases to occupy the dwelling as a principal dwelling (12 CFR 226.33). 7. Require a creditor who issues a reverse mortgage to provide specified disclosures to the borrower, informing the borrower that he or she is not obligated to complete the reverse mortgage transaction merely because he or she has received the disclosures required by federal law or has signed an application for a reverse mortgage loan; providing the borrower with a good-faith projection of the total cost of the credit to him or her, as specified; and itemizing pertinent information about the loan, including the loan terms, charges, the age of the youngest borrower, and the appraised property value (12 CFR 226.33). 8. Provide consumers with a three-day right to rescind a consumer credit transaction, other than a residential mortgage, in which a security interest is or will be retained or acquired in a consumer's principal dwelling, as specified (12 CFR 226.23). 9. Establish, within the United States Department of Housing and Urban Development (HUD), the Home Equity Conversion Mortgage (HECM) program to provide federal insurance for reverse mortgages that meet HUD requirements. Make the HECM loan available to persons 62 years of age and older and provide that HECM loans, made against home equity, shall not come due until the borrower(s) dies, moves out of the home permanently, or sells the home. Provide, however, that loan may become due earlier if the borrower(s) fails to pay property taxes or to maintain the home, as specified in the loan agreement. Provide that at the time the loan comes due, the property shall be sold to retire the loan amount, with any residue returning to the estate or heirs of the borrower. Require any prospective heir to satisfy the lender's lien before taking title to the property (24 CFR Part 206). 10. Require that all applicants for an insured HECM loan receive adequate counseling from an independent third party that is not, AB 1700 (Medina), Page 4 either directly or indirectly, associated with or compensated by the lender, loan originator, or loan servicer, or by any party associated with the sale of annuities, investments, long-term care insurance, or any other type of financial or insurance product. Require the lender, at the time of initial contact, to provide the borrower with a list of approved HUD counseling agencies (24 CFR 206.41). EXISTING STATE LAW 1. Defines a reverse mortgage as a nonrecourse loan secured by real property, which meets all of the following criteria (Civil Code Section 1923): a. The loan provides cash advances to a borrower based on the equity or value in a borrower's owner-occupied principal residence. b. The loan requires no payment of principal or interest until the entire loan becomes due and payable. c. The loan is made by a lender licensed or chartered pursuant to California or federal law. 2. Specifies several conditions that must be satisfied by lenders who make reverse mortgage loans, and several prohibitions that apply to those lenders, and includes among those rules, the following (Civil Code Section 1923.2): a. Before a lender may accept a final and complete application for a reverse mortgage loan or assess any fees, that lender must: i. Refer the prospective borrower to a housing counseling agency approved by the United States Department of Housing and Urban Development (HUD); ii. Provide the borrower with a list of at least ten housing counseling agencies approved by HUD, including at least two agencies that can provide counseling by telephone; iii. Receive a certification from the applicant or the applicant's authorized representative that the applicant has received counseling from a HUD-approved counseling agency. The counseling is required to meet AB 1700 (Medina), Page 5 the standards and requirements established by HUD for reverse mortgage counseling. The certification must be signed by the borrower and the agency counselor, and must include the date of counseling, and the name, address, and telephone numbers of both the counselor and the borrower; iv. Provide the borrower with a specified notice and checklist, whose text is specified in existing law, both of which are intended for use by the borrower when preparing for and meeting with a reverse mortgage counselor. b. No lender may make a reverse mortgage loan without first complying with, or in the case of brokered loans, ensuring compliance with, the requirements of Civil Code Section 1632, relating to the translation of loan documents. 3. Prohibits a reverse mortgage lender from participating in, being associated with, or employing any party that is associated with any other financial or insurance activity, unless the lender maintains procedural safeguards intended to ensure that individuals participating in the origination of the mortgage have no involvement with or incentive to provide the prospective borrower with any other financial or insurance product. Further prohibits a reverse mortgage lender from referring the borrower to anyone for the purchase of an annuity or other financial or insurance product prior to closing the reverse mortgage or before the borrower's right to rescind the mortgage contract has expired (Civil Code Section 1923.2). 4. Provides that reverse mortgage loan payments made to a borrower must be treated as proceeds from a loan, and not as income, for the purpose of determining eligibility and benefits under means-tested programs of aid to individuals, but only to the extent that such requirements do not conflict with federal law or result in the loss of federal funding (Civil Code Section 1923.9). 5. Requires financial institutions, as defined, and their officers and employees, to report suspected financial abuse of an elder or dependent adult, as defined, and makes failure to report suspected financial abuse a violation of the law, subject to a civil penalty up to $1,000 ($5,000 if failure to report is willful), paid by the financial institution to the party bringing the action (Welfare and Institutions Code Section AB 1700 (Medina), Page 6 15630.1). COMMENTS 1. Purpose: This bill is sponsored by the Fair Housing Council of Riverside County to help minimize the chances that California seniors will enter into reverse mortgages that are not appropriate for them. 2. Background: As summarized above, both federal and state law contain provisions intended to ensure that seniors fully understand the implications of obtaining a reverse mortgage before they contractually commit themselves to one. Prospective reverse mortgage borrowers must obtain reverse mortgage counseling from a HUD-certified counselor before their reverse mortgage application can legally be approved by a reverse mortgage lender. California also requires seniors to be provided with a specified notice and a reverse mortgage checklist, which are intended to warn them about potential pitfalls of obtaining a reverse mortgage and help prepare them to get the most out of their counseling session. Despite these safeguards, several seniors have found themselves in default on their reverse mortgages. Although California-specific default rates are unavailable, national default rates on reverse mortgages hit a record 9.4 percent in 2012, almost double the default rate on traditional mortgages. This bill would make three substantive changes to California's existing reverse mortgage rules. First, it would institute a seven-day cooling-off period by prohibiting a reverse mortgage lender from accepting a senior's final and complete reverse mortgage application until at least seven days have passed following the senior's counseling session. Second, it would change the wording of the notice that is provided to seniors when they apply for a reverse mortgage. Third, it would replace the checklist that must be provided to seniors before their counseling session with a more extensive worksheet guide. 3. Reverse Mortgages By The Numbers: Nearly all reverse mortgages being offered in today's economy are the federally-insured mortgages known as HECM mortgages. The insurance guarantees that borrowers will be able to access their authorized loan funds, subject to the terms of the loan, even if their loan balance exceeds the value of their AB 1700 (Medina), Page 7 home or if the lender fails. The insurance also guarantees lenders that they will be repaid in full when the home is sold, regardless of the home value at the time of sale. Neither borrowers nor their estates are liable for loan balances that exceed the value of the home at the time of repayment; the Federal Housing Administration (FHA; a division of HUD) assumes that risk. According to HUD, which runs the HECM program, the number of HECM reverse mortgages made annually grew from fewer than 500 in federal fiscal years 1990 and 1991 to nearly 115,000 in federal fiscal year 2009, the year in which reverse mortgage originations peaked. The number of reverse mortgages made since 2009 has dropped significantly - down to about 55,000 in 2012 and 60,000 in 2013. Falling housing values that accompanied the foreclosure crisis are partly to blame; others point to increased regulation at the federal level as a contributing factor. Whatever the cause, several major mortgage lenders (including Bank of America and Wells Fargo) have exited the reverse mortgage origination business entirely within the past few years; fewer lenders occupy this space than was the case a few years ago, and those that remain tend to be smaller than those which exited the market. At present, only two to three percent of eligible homeowners currently have a reverse mortgage. However, the graying of the baby boom generation carries with it the potential that reverse mortgages will grow in popularity over the next two decades. 4. Recent Changes To HECM Rules: Late last year, Congress and the FHA took steps to reduce the incidence of reverse mortgage defaults by people who take lump sum withdrawals at the time of reverse mortgage origination, and later become delinquent on their property taxes and homeowners insurance policies. Pursuant to the federal Reverse Mortgage Stabilization Act of 2013 (Public Law 113-29), the FHA has placed strict limits on reverse mortgage loan sizes and implemented a series of rules intended to help encourage reverse mortgage borrowers to withdraw their loan funds gradually, over time, rather than in a single lump sum. Under the new rules, homeowners are limited to withdrawing no more than 60% of their maximum loan amounts during the first year of their loan. Homeowners will also be required to show that they have sufficient income to cover expenses AB 1700 (Medina), Page 8 such as property taxes and homeowners insurance throughout the life of their loan. Those who are unable to demonstrate sufficient income will be required to set aside a portion of their loan proceeds in escrow accounts to cover future property taxes and insurance. Under authority granted to it in the Reverse Mortgage Stabilization Act, FHA has also taken steps to protect non-borrowing spouses (spouses of reverse mortgage borrowers, whose names are not on the reverse mortgage loan, and who, under prior HECM rules, could lose their home following the death, move, or 12-month absence from the home of the borrowing spouse). Under these new rules (described in FHA Mortgagee Letter 2014-07), FHA is making it easier for non-borrowing spouses to remain in their homes during the remainders of their lifetimes, as long as they meet certain basic requirements and ensure that their loans do not fall into default (through nonpayment of property taxes or insurance, or through inability to maintain the home). These new rules apply to new reverse mortgage loans issued on or after August 4, 2014; they do not apply retroactively to reverse mortgage loans originated before that date. 5. Recent Federal Study of Reverse Mortgages: In June 2013, the federal Consumer Financial Protection Bureau (CFPB) issued a report on reverse mortgages, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (http://www.consumerfinance.gov/reports/reverse-mortgages-rep ort/). Although that report does not reflect the recent changes to the HECM program summarized immediately above, it does provide valuable information about the challenges facing seniors trying to decide whether a reverse mortgage is right for them. CFPB reached five conclusions in its report, as follows: a. Reverse mortgages are complex products that are difficult for consumers to understand. Disclosures available to consumers to help them understand prices and risks are insufficient to ensure that consumers make good decisions. b. Reverse mortgage borrowers are using their loans differently, and in more risky ways than they did in the past. Borrowers are taking out these loans at younger ages than in the past, and are withdrawing more of their money upfront than in the past. Borrowers who withdraw AB 1700 (Medina), Page 9 all of their available home equity upfront will have fewer resources to draw upon to pay for everyday and major expenses later in life. These borrowers are also at risk of becoming delinquent on taxes and/or insurance and ultimately losing their homes to foreclosure. c. Product features, market dynamics, and industry practices also create risks for consumers. Misleading advertising remains a problem. Spouses of reverse mortgage borrowers who are not named as co-borrowers often do not understand that they may be at risk of losing their homes. 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. d. Counseling, while designed to help consumers understand the risks associated with reverse mortgages, needs improvement in order to be able to meet these challenges. Counselors need improved methods to help consumers better understand the complex tradeoffs that they face in deciding whether to take out a reverse mortgage. Funding for counseling is under pressure, making access to high-quality counseling more difficult. Counseling may be insufficient to counter the effects of misleading advertising, aggressive sales tactics, or questionable business practices. e. 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. Cross-selling appears to have been considerably dampened as a result of federal legislation. However, existing disclosures are very difficult for consumers to understand. Furthermore, while there are general prohibitions against deceptive advertising, there are no specific federal rules governing deceptive advertising with respect to reverse mortgages. In issuing the report, the CFPB left open the possibility that it might promulgate additional reverse mortgage regulations; develop enhanced approaches to better educate consumers about the risks and tradeoffs of reverse mortgages and help them compare different products; take enforcement AB 1700 (Medina), Page 10 actions, as necessary; and work with HUD to develop solutions to issues it identified that are under HUD's jurisdiction. This bill attempts to address two of the many problems identified by CFPB: inadequate tools available to help consumers understand how a reverse mortgage may affect them and aggressive sales tactics that push seniors to submit their reverse mortgage loan applications before they have had an opportunity to fully evaluate whether a reverse mortgage is right for them. 6. Summary of Arguments in Support: a. The Fair Housing Council of Riverside County is sponsoring this measure to better protect reverse mortgage applicants. The worksheet guide whose use this bill will require, and the additional time this bill would require to pass between a counseling session and submission of a reverse mortgage application, will provide seniors with additional time to review and discuss the numerous documents, fees, disclosures, and potential outcomes of the reverse mortgage with their families and heirs. b. The California Commission on Aging, AARP, California Advocates for Nursing Home Reform (CAHNR), Consumers Union, Center for Responsible Lending, Consumer Federation of California, and California Retired Teachers Association all support AB 1700 for similar reasons. The bill will help seniors better understand the ramifications of the agreement into which they are about to enter, and provide them additional time in which to do so. The seven-day cooling off period will help prevent unscrupulous reverse mortgage lenders or brokers from pressuring seniors to enter into reverse mortgages before they have had an opportunity to evaluate whether a mortgage is right for them. CAHNR writes, "Because reverse mortgage decision-making involves a number of complex issues, before committing to a loan every senior should contemplate possible negative consequences. While reverse mortgages have many attractive features, seniors need to be way of the possible downsides of these products and aware of some of the negative aspects that may make them unsuitable for a AB 1700 (Medina), Page 11 senior's needs and long-term financial objectives. Whether a loan is 'suitable' or right for the borrower who is considering it can only be determined by looking at the totality of that particular borrower's circumstances, goals, and needs...Every prospective purchaser of a reverse mortgage would benefit by studying and completing the worksheet proposed by AB 1700 before attending his or her mandatory reverse mortgage counseling session." 7. Summary of Arguments in Opposition: The National Reverse Mortgage Lenders Association (NRMLA) is opposed to the bill, unless it is amended to strike the seven-day cooling off period it requires. NRMLA also expressed concern that the wording of the Worksheet Guide may not keep up with changes to the HECM program. NRMLA disputes the contention that seniors are rushed through the application process without being given a chance to fully consider the transaction. The origination, processing, underwriting, closing, and funding of reverse mortgage loans typically takes a few months, and involves significant back-and-forth as information is provided to and received from applicants. Prospective reverse mortgage borrowers are provided with ample opportunity for full deliberation and consideration. "The proposed seven (7)-day delay is an ill-conceived and unnecessary safeguard that could exacerbate timing issues in certain circumstances under which HECMs are commonly used, such as when the reverse mortgage is being used to save a senior's home from foreclosure, cover emergency medical expenses, pay for home modifications or repairs, or for the purchase of a new home. The seven (7)-day cooling-off period requirement could potentially harm seniors who want or need timely access to funds to save or buy their homes, or cover emergency expenses, by unnecessarily making them wait longer to access the funds from a reverse mortgage." In certain circumstances, the requirement to wait a week could prevent a senior from locking in an advantageous interest rate. NRMLA is also concerned about the language of the Reverse Mortgage Worksheet Guide that this bill would require. In its letter of opposition, the organization identified one statement in the guide that is incorrect as of the FHA's AB 1700 (Medina), Page 12 2014-07 Mortgagee Letter, and another phrase in the guide that is misleading. [Staff notes that the amendments suggested below would modify the language of the guide to address both concerns identified in NRMLA's letter; see amendments 8c and 8d, below]. However, NRMLA also raised a concern about the Worksheet Guide that is not addressed by the amendments. "Because HUD's requirements for HECMs might change from time to time (HUD has a twenty-year history of continually improving the HECM program), placing detailed language for the Worksheet in the state statute seems to us to be ill-advised, if it could result in a requirement under California law that lenders and/or counselors must provide consumers with information that is inconsistent with federal law." 8. Amendments: The following amendments have been agreed to by the author, sponsor, and several of the bill's proponents: a. Page 5, line 21, strike "elapse" and insert: lapse b. Page 6, line 22: Strike "SUITABLE" and insert: RIGHT c. Page 8, lines 12 and 13, strike "whose only job is to" and insert: who can d. Page 8, line 18, strike "becomes" and insert: may become e. Page 9, lines 16 and 17, revise as follows: Reverse mortgages are compounding -interest loans, and the debt to the lender increasesacceleratesas time goes on. f. Page 9, line 24, strike: 2. g. Page 9, lines 31 and 32, revise as follows: Due to the high cost and increasingacceleratingdebt incurred by reverse mortgage borrowersmortgages, using home equity to finance investments is not suitable in most instances. h. Page 10, strike line 6. 9. Prior and Related Legislation: AB 1700 (Medina), Page 13 a. AB 553 (Medina), 2013-14 Legislative Session: Very similar to this bill, although AB 553 contained less detail regarding the elements of the worksheet guide. Never heard by the Assembly Banking & Finance Committee. b. AB 2010 (Bonilla), 2011-12 Legislative Session: Required reverse mortgage counseling that is provided to California reverse mortgage borrowers to be provided in-person, unless the borrower elects to receive that counseling in another manner. c. AB 329 (Feuer), Chapter 236, Statutes of 2009: Prohibited reverse mortgage lenders and brokers from cross-selling other financial or insurance products, as specified. Increased, from five to ten, the number of HUD-certified reverse mortgage counseling agencies that must be provided to prospective reverse mortgage borrowers by reverse mortgage lenders. Required provision of a checklist to prospective reverse mortgage borrowers, and required this checklist to be signed by the borrower (and his or her reverse mortgage counselor, if counseling was performed in person) before the borrower's loan application could be processed. d. SB 1609 (Simitian), Chapter 202, Statutes of 2006: Prohibited lenders from making reverse mortgages without first receiving a signed certification that the borrower received independent counseling about the transaction, prohibited lenders from requiring borrowers to purchase annuities as part of the reverse mortgage transaction, and added reverse mortgages to the list of financial documents that must be translated into a foreign language, if negotiated in that language. LIST OF REGISTERED SUPPORT/OPPOSITION Support Fair Housing Council of Riverside County (sponsor) AARP California Advocates for Nursing Home Reform California Commission on Aging California Retired Teachers Association Center for Responsible Lending Consumer Federation of California AB 1700 (Medina), Page 14 Consumers Union Sandy Jolley Opposition National Reverse Mortgage Lenders Association Consultant: Eileen Newhall (916) 651-4102