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 ITS EFFECT . EFFECT ON YOUR FUTURE NEEDS. BEFORE
ENTERING INTO THIS TRANSACTION, YOU ARE REQUIRED TO CONSULT
WITH AN INDEPENDENT LOAN 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 increases accelerates as 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 increasing accelerating debt incurred
by reverse mortgage borrowers mortgages , 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