BILL ANALYSIS Ó
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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