BILL ANALYSIS                                                                                                                                                                                                    






                             SENATE JUDICIARY COMMITTEE
                         Senator Hannah-Beth Jackson, Chair
                              2013-2014 Regular Session


          AB 1700 (Medina)
          As Amended June 10, 2014
          Hearing Date: June 17, 2014
          Fiscal: No
          Urgency: No
          TH


                                        SUBJECT
                                           
                          Reverse Mortgages: Notifications

                                      DESCRIPTION  

          Existing law prohibits a lender from taking a reverse mortgage  
          application without first providing an applicant with a  
          specified disclosure and written checklist.  Existing law also  
          requires prospective borrowers to receive counseling before  
          entering into a reverse mortgage.

          This bill would make certain changes to the required disclosure,  
          would replace the written checklist with a worksheet that must  
          be signed by both the prospective borrower and a loan counselor,  
          and would implement a seven-day waiting period between the date  
          the borrower receives loan counseling and the point at which a  
          lender may accept a final and complete application for a reverse  
          mortgage loan.  

                                      BACKGROUND  

          A reverse mortgage is a loan against home equity, providing a  
          cash advance to an older consumer and requiring no payment until  
          a future time - usually not until the consumer dies, sells the  
          home, or permanently moves away.   The advantage of a reverse  
          mortgage is that it allows an older consumer to convert some of  
          his or her home equity into spendable cash while the consumer  
          retains ownership of the home.  Under a reverse mortgage loan,  
          the loan proceeds are paid out to a consumer in a single lump  
          payment, periodic installments, or on a line of credit basis  
          over a number of years.  At the time when the loan is due and  
          payable, a consumer (or his or her heirs) is required to pay  
                                                                (more)



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          back all the loan advances plus interest and any other charges.   
          In many instances this involves selling the house to pay off the  
          reverse mortgage.

          There are several different types of reverse mortgages,  
          including those insured by the Federal Housing Administration  
          (FHA), non-FHA insured reverse mortgages, which include an  
          annuity, and non-FHA insured fixed rate reverse mortgages.   
          However, all share some common features.  Reverse mortgages are  
          considered "rising debt" loans, meaning that the loan balance  
          grows larger over time since a consumer is not obligated to pay  
          back any principal or interest until a future date.  The total  
          amount of interest a consumer owes would therefore increase  
          significantly over time as the interest compounds.  In addition,  
          most reverse mortgages are non-recourse loans, where a  
          consumer's legal obligation to pay back the loan is limited by  
          the value of the home.  Finally, most reverse mortgages are  
          first mortgages, meaning that the home must be freed of all  
          prior debt before a reverse mortgage may be issued.

          Reverse mortgages are typically more complicated than other  
          types of consumer loans.  According to one recent article:

            Used wisely, reverse mortgages enable older adults to tap the  
            value of their homes without having to uproot themselves and  
            sell.  But experts warn retirees to tread carefully with these  
            complicated loans.  Used improperly, a reverse mortgage can  
            leave a retiree broke and without a roof over his head. . . .  
            Mistake No. 1 is approaching reverse mortgages like any other  
            loan.  "But there's no question that taking out a reverse  
            mortgage is vastly more complicated than taking out a  
            home-equity line or a mortgage to buy a house," says Bernard  
            Krooks, a partner of Littman Krooks LLP in New York who  
            specializes in elder law. . . . The main difference between a  
            reverse mortgage and traditional mortgage is that the loan  
            must be repaid in full when the homeowners-as listed on the  
            deed-no longer live in the house.

            Many reverse-mortgage borrowers run into trouble, pulling all  
            the equity out of their home, using up the cash, then finding  
            they are unable to afford insurance, taxes and upkeep for the  
            property.  Some couples have been foreclosed on when only one  
            spouse was listed on the deed, and that person subsequently  
            died or moved into a nursing home. . . . Experts stress that a  
            decision to take a reverse mortgage is best made with input  
            from financial advisers, accountants and estate-planning  
                                                                      



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            attorneys. "While it can be a useful part of estate planning,  
            it's not for everyone," says Mr. Krooks.  "It shouldn't be  
            done without being looked at in terms of overall financial  
            needs."  (Lauricella, A Kinder, Gentler Reverse Mortgage (Mar.  
            22, 2014) Wall Street Journal  
             (as of June 11,  
            2014).)

          California law includes a number of provisions to protect  
          consumers who seek to enter into reverse mortgages, including  
          prohibiting lenders from taking reverse mortgage applications  
          without first providing an applicant with certain disclosures  
          and a written checklist, and requiring prospective borrowers to  
          receive loan counseling before entering into a reverse mortgage.  
           This bill would provide additional consumer protections for  
          individuals considering taking out a reverse mortgage.   
          Specifically, this bill would make certain changes to the  
          disclosure that must be given to prospective borrowers, replace  
          the written checklist lenders must provide borrowers with a  
          worksheet that must be signed by both the prospective borrower  
          and a loan counselor, and implement a seven-day waiting period  
          between the date the borrower receives loan counseling and the  
          point at which a lender may accept a final and complete  
          application for a reverse mortgage loan.  

                                CHANGES TO EXISTING LAW
           
           1.Existing state law  defines a "reverse mortgage" as a  
            nonrecourse loan secured by real property which: (1) provides  
            cash advances based on the value of the residence; (2)  
            requires no payment of principal or interest until the entire  
            loan becomes due; and (3) is made by a lender licensed and  
            chartered pursuant to state or federal law.  (Civ. Code Sec.  
            1923.)  A loan is due when: (1) the residence securing the  
            loan is sold or transferred; (2) all borrowers stop occupying  
            the dwelling as a principal residence, as specified; (3) a  
            fixed maturity date occurs; or (4) an event specified in the  
            loan documents occurs, which jeopardizes the lender's  
            security.  (Civ. Code Sec. 1923.2(f).)
           
            Existing federal regulations  require all lenders who offer  
            reverse mortgages to make specified disclosures to a borrower  
            before the closing of the transaction that include a  
            "good-faith projection of the total cost of the credit,"  
            including costs and advances to a borrower (accounting for any  
                                                                      



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            annuities sold as part of the transaction) and projections of  
            the total cost of the transaction based on different  
            appreciation rates and loan periods.  (12 C.F.R. Secs. 226.31,  
            226.33.)

             Existing federal regulations  also establish that a borrower  
            may rescind a reverse mortgage contract within three days of  
            executing the contract. (12 C.F.R. Sec. 226.15.)  This right  
            of rescission does not apply, however, to a reverse mortgage  
            that is used to purchase a residence.  (12 C.F.R. Sec.  
            226.15(f).)

             Existing federal law  places additional restrictions on reverse  
            mortgages that are federally insured.  A reverse mortgage may  
            only be federally insured if it is provided to mortgagors who:  
            (1) are at least 62 years of age; (2) have received adequate  
            counseling by a third party; and (3) have received full  
            disclosure of all costs.  (12 U.S.C. Sec. 1715z-20(d)(2).)   
            For the third-party counseling requirement, a mortgagee must  
            provide a list of contact information for reverse mortgage  
            counselors who are approved by the Secretary of the Department  
            of Housing and Urban Development at the time of the mortgage  
            application.  (12 U.S.C. Sec. 1715z-20(f).)

             Existing state law  requires a lender to provide a borrower  
            with a list of not fewer than 10 United States Department of  
            Housing and Urban Development approved counseling agencies  
            prior to accepting a final and complete application for a  
            reverse mortgage.  (Civ. Code Sec. 1923.2(j).)

             Existing state law  prohibits a lender from accepting a final  
            and complete application for a reverse mortgage loan from a  
            prospective applicant, or assessing any fees, without  
            receiving a certification from an applicant or their  
            representative that the applicant received counseling, as  
            specified.  (Civ. Code Sec. 1923.2(k).)

             This bill  would provide that a lender shall not accept a final  
            and complete application for a reverse mortgage loan from a  
            prospective applicant or assess any fees until the lapse of  
            seven days from the date the applicant received counseling.

           2.Existing law  requires a lender to provide a statement to a  
            prospective borrower before accepting a reverse mortgage loan  
            application, advising the borrower in 16-point type, among  
            other things, that: (1) it is important to understand the  
                                                                      



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            terms of the reverse mortgage; and (2) that the borrower is  
            required to consult with an independent loan counselor.  (Civ.  
            Code Sec. 1923.5.)

             This bill  would modify the required statement to read as  
            follows (changes in italics):
            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.

          3.Existing law  provides that in addition to the statement above,  
            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.  (Civ. Code Sec.  
            1923.5.)
           
            This bill  would replace the written checklist above with a  
            worksheet guide that must be provided prior to a prospective  
            borrower's meeting with a counseling agency on reverse  
            mortgages.  The worksheet guide would provide information on  
            the following five topics:
                 what happens to others in the home if the borrower dies  
               or moves out;
                 conditions under which a borrower can default on a  
               reverse mortgage;
                 alternatives to reverse mortgages;
                 the use of reverse mortgages to purchase financial  
               products; and
                 the impact of reverse mortgages on eligibility for  
               government assistance programs.

             This bill  would also codify certain findings related to the  
            development and use of reverse mortgages.


                                        COMMENT
           
          1.  Stated need for the bill  
                                                                      



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          The author writes:
          
            California has seen a growing trend of seniors being  
            aggressively targeted and marketed to by the financial  
            industry with reverse mortgages.  According to the Consumer  
            Attorneys of California, there are more than 110,000 active  
            reverse mortgages in the state, and nearly ten percent of  
            those loans are in default.  On any given day, a California  
            senior citizen could potentially: contact a lender for a  
            reverse mortgage, have an hour long phone counseling session  
            (without the assurance of detailed information and clarity of  
            the loan), and sign up for an inappropriate reverse mortgage  
            product all in the same day.  The reverse mortgage sales  
            pitches are highly sophisticated, and the advertisements are  
            often made by celebrities that focus primarily on the positive  
            parts of the loan.  The State of California has an interest in  
            assuring that only appropriate reverse mortgages are sold to  
            seniors.  Low wealth seniors who become involved with  
            unsuitable reverse mortgage loans run the ultimate risk of not  
            only losing their homes, but also becoming a financial burden  
            to the State.

            AB 1700 helps seniors evaluate whether or not a reverse  
            mortgage is appropriate for their needs [by requiring  
            prospective borrowers to complete] a Reverse Mortgage  
            Worksheet Guide.  The bill also places a seven day cooling off  
            period between the time of counselling, and loan application  
            submission, which gives seniors ample time to discuss the  
            questions, answers, and potential outcomes of a reverse  
            mortgage with their families.  The current practice for  
            reverse home mortgages begins with a senior contacting a  
            reverse mortgage professional who specializes in these loans.   
            The reverse mortgage professional clearly explains the terms  
            and benefits and costs of each product, after which seniors  
            are provided with a list of HUD-approved counselors to  
            contact.  Most counseling sessions take place either  
            face-to-face or by telephone, although most are done over the  
            phone, as they have been trained to deliver the required  
            information either way.  When the session is complete, both  
            the counselor and senior sign a counseling certificate  
            verifying they have fulfilled this requirement.  AB 1700  
            provides the necessary time and safeguards needed for elderly  
            clients who decide to proceed with these types of loans.

          2.  Ensuring Consumers are Fully Informed  
                                                                      



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          Since 1997, the Legislature has required lenders to provide  
          prospective borrowers with specific information and resources to  
          help ensure that borrowers fully understand the implications of  
          entering into reverse mortgages.  Over time, the Legislature has  
          required lenders to provide specific disclosures to consumers  
          (AB 456 (Ducheny, Ch. 797, Stats. 1997)), has required consumers  
          to receive specially tailored housing counseling (AB 1609  
          (Simitian, Ch. 202, Stats. 2006)), and has required lenders to  
          provide borrowers with a checklist prior to counseling that  
          highlights the risks and alternatives to reverse mortgages (AB  
          329 (Feuer, Ch. 236, Stats. 2009)).

          This bill continues in the direction of ensuring that  
          prospective borrowers receive the information and resources they  
          need in order to make informed decisions about entering into  
          reverse mortgages.  Specifically, this bill would strengthen the  
          disclosure statement currently provided to prospective  
          borrowers, would replace the existing written checklist with a  
          worksheet guide designed to force critical reflection on the  
          implications of entering into a reverse mortgage, and would  
          impose a seven day cooling-off period before a lender could  
          accept a reverse mortgage application.  According to the  
          sponsor, the Fair Housing Council of Riverside County:

            AB 1700 (Medina) protects elderly reverse mortgage borrowers  
            in the reverse mortgage marketplace by ensuring all  
            [prospective] applicants have: consulted with a HUD-approved  
            reverse mortgage counselor, have discussed the items in the  
            reverse mortgage worksheet guide, and have allowed a seven day  
            cooling off period between the time of counseling, and the  
            time of loan application submission.  These enhanced  
            protective measures provide the elderly client with additional  
            time to review and discuss the numerous documents, fees,  
            signed disclosures, and potential outcomes with their families  
            and heirs.

          Similarly, the California Commission on Aging writes:

            Reverse mortgages may appear to older adults to be a  
            reasonable solution to money problems.  The reality is much  
            different and much riskier, and many elderly enter into these  
            loan agreements without fully understanding the potential  
            peril.  AB 1700 addresses this issue by imposing a seven-day  
            waiting period before a lender can accept a reverse mortgage  
            application and requiring borrowers to complete a worksheet  
                                                                      



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            detailing obligations and risks.  Both steps will help  
            borrowers to better understand the ramifications of the  
            agreement they are about to undertake, potentially helping  
            them to make the best decision for their circumstances.

          Giving consumers a better understanding of the financial  
          implications of entering into a reverse mortgage is crucial,  
          especially in light of the rate at which these mortgages go into  
          default.  According to the AARP, "about 58,000 reverse mortgages  
          - nearly 1 in 10 - were in default" at the end of 2012.  (See  
          Fleck, Are Reverse Mortgages Helpful or Hazardous? (April 2013)  
          <  
          http://www.aarp.org/money/credit-loans-debt/info-04-2013/are-reve 
          rse-mortgages-helpful.1.html> (as of June 11, 2014).)  Staff  
          notes that this rate of default is almost twice the delinquency  
          rate for all mortgage loans (6.11 percent for mortgage loans on  
          one-to-four-unit residential properties) and just under four  
          times the rate that mortgages go into foreclosure (2.65  
          percent).  (See Mortgage Bankers Association, Delinquency and  
          Foreclosure Rates Continue to Improve  (as of June 11,  
          2014).)


          3.  Seven Day Cooling-Off Period  

          This bill would also add a new seven day mandatory cooling-off  
          period to the existing reverse mortgage regulatory scheme by  
          prohibiting a lender from taking a reverse mortgage application  
          or assessing any fees until seven days after the date a  
          prospective borrower has received their loan counseling.  Staff  
          notes that this new cooling-off period would potentially allow  
          borrowers more time to consider their suitability for a reverse  
          mortgage and to seek help and assistance in understanding how a  
          reverse mortgage would impact their financial well-being without  
          feeling the pressure of a lender to immediately begin an  
          application.  Indeed, more time to seek help and reflect on the  
          consequences of a reverse mortgage seems crucial.  According to  
          a recent report from the Consumer Financial Protection Bureau:

            The costs, risks, and benefits of reverse mortgages are  
            complex.  Consumers struggle to understand the product and  
            make good decisions about tradeoffs on two levels.  First,  
            they may have difficulty deciding between a reverse mortgage  
            and an alternate course of action, such as downsizing,  
            refinancing with a traditional mortgage, or using a  
                                                                      



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            traditional home equity loan or line of credit.  Second,  
            consumers may have difficulty assessing costs and making  
            tradeoffs between the different types of reverse mortgage  
            products and options in the marketplace today.  (Consumer  
            Financial Protection Bureau, Reverse Mortgages: Report to  
            Congress (Jun. 28, 2012) <  
            http://files.consumerfinance.gov/a/assets/documents/  
            201206_cfpb_Reverse_Mortgage_Report.pdf> (as of June 11,  
            2014).)
          
          However, the opposition argues that the new waiting period could  
          be harmful to a borrower who would benefit from entering into a  
          reverse mortgage if, for example, rapidly changing interest  
          rates make a later application more expensive.  The National  
          Reverse Mortgage Lenders Association (NRMLA), writing in  
          opposition, notes:

            The proposed seven (7) day delay is an ill-conceived and  
            unnecessary safeguard that could exacerbate timing issues in  
            certain circumstances under which [reverse mortgages] 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  
            the purchase of a new home. . . . Furthermore, the "expected  
            interest rate," a key factor in determining how much money is  
            available to a homeowner from a [reverse mortgage] may be set  
            and locked at the time of loan application. . . . if the seven  
            (7) day-cooling-off period was in effect, and interest rates  
            moved upwards during the week that a loan applicant waits it  
            out, the applicant would be penalized by receiving a lesser  
            amount of proceeds from the [reverse mortgage.]

          Further, NRMLA suggests that the seven day cooling-off period is  
          unnecessary because the existing loan application process  
          provides multiple opportunities for potential borrowers to stop  
          an application to evaluate the consequences of entering into a  
          reverse mortgage during the length of time it takes to process  
          and underwrite an application, and observes that under the  
          federal Truth in Lending Act a consumer has three business days  
          after a loan has closed to rescind it and cancel the  
          transaction.  However, staff notes that during this new  
          statutory period, unlike other potential opportunities to "cool  
          off," a borrower would likely be free from any pressure by a  
          lender to enter into a reverse mortgage, would not feel  
          compulsion to continue an application already underway, and  
          would not yet have made any potentially non-refundable fees or  
                                                                      



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          payments to a lender.

          4.  Opposition's remaining concerns  

          An opposition letter from NRMLA dated May 29, 2014, raises  
          additional concerns regarding the accuracy of certain elements  
          of the new required worksheet guide that borrowers must complete  
          prior to receiving loan counseling.  The author, in response,  
          notes that recent amendments taken in the Senate Committee on  
          Banking and Financial Institutions address the concerns raised  
                                                               in NRMLA's letter.  NRMLA, further argues that because federal  
          requirements for reverse mortgages might change, "placing  
          detailed language for the Worksheet in the state statue 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."

          Additionally, NRMLA suggests that proposed changes to the law  
          regarding the required disclosure statement may unintentionally  
          restrict who can provide copies of the worksheet guide and  
          disclosure statement to prospective borrowers prior to their  
          completing an application, especially if the borrower opts to  
          receive counseling before consulting a lender.  In response, the  
          author notes that the bill expressly allows both lenders and  
          loan counselors to provide copies of all required disclosure  
          documents and worksheets.


           Support  :  AARP, Inc.; California Advocates for Nursing Home  
          Reform; California Commission on Aging; Center for Responsible  
          Lending; Consumer Federation of California; California Retired  
          Teachers Association; 23 individuals

           Opposition  :  National Reverse Mortgage Lenders Association

                                        HISTORY
           
           Source  :  Fair Housing Council of Riverside County

           Related Pending Legislation  :  None Known

           Prior Legislation  :

          AB 553 (Medina, 2013) was substantially similar to this bill.   
          AB 553 died in the Assembly Committee on Banking and Finance.
                                                                      



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          AB 2010 (Bonilla, Ch. 641, Stats. 2012) requires a prospective  
          borrower to receive reverse mortgage counseling in person,  
          unless the borrower elects to receive the counseling in another  
          manner.

          AB 793 (Eng, Ch. 223, Stats. 2011) generally prohibits an  
          insurance broker or agent from participating in, being  
          associated with, or employing any party that participates in or  
          is associated with, the origination of a reverse mortgage.

          SB 660 (Wolk, 2010) would have provided that a lender, broker,  
          person, or entity that recommends the purchase of a reverse  
          mortgage in anticipation of financial gain owes the prospective  
          borrower a duty of honesty, good faith, and fair dealing, and  
          would have provided that a person or entity shall not attempt to  
          avoid that duty.  This bill died in the Assembly Committee on  
          Banking and Finance.

          AB 329 (Feuer, Ch. 236, Stats. 2009) strengthened existing  
          counseling and cross-selling provisions and required lenders to  
          provide the borrower with a checklist prior to counseling that  
          highlights the risks and alternatives to reverse mortgages.

          AB 1609 (Simitian, Ch. 202, Stats, 2006) prohibits a reverse  
          mortgage lender from accepting a reverse mortgage application or  
          assessing any fees until the lender has received a certification  
          from the potential borrower that the borrower received   
          independent counseling regarding the transaction.

          AB 456 (Ducheny, Ch. 797, Stats. 1997) implemented new  
          provisions governing reverse mortgages, including requiring a  
          loan applicant to receive a prescribed statement before entering  
          into a reverse mortgage loan.  This bill also specified that  
          reverse mortgage loan payments are not considered income for  
          purposes of determining eligibility and benefits under  
          means-tested aid programs.

           Prior Vote  :

          Senate Committee on Banking and Financial Institutions (Ayes 7,  
          Noes 0)
          Assembly Floor (Ayes 73, Noes 1)
          Assembly Committee on Banking and Finance (Ayes 11, Noes 1)

                                   **************
                                                                      



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