BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1700|
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THIRD READING
Bill No: AB 1700
Author: Medina (D)
Amended: 6/10/14 in Senate
Vote: 21
SENATE BANKING & FINANCIAL INST. COMM .: 7-0, 6/4/14
AYES: Evans, Block, Correa, Hill, Roth, Torres, Vidak
NO VOTE RECORDED: Hueso, Morrell
SENATE JUDICIARY COMMITTEE : 6-0, 6/17/14
AYES: Jackson, Corbett, Lara, Leno, Monning, Vidak
NO VOTE RECORDED: Anderson
ASSEMBLY FLOOR : 73-1, 4/24/14 - See last page for vote
SUBJECT : Reverse mortgages: notifications
SOURCE : Fair Housing Council of Riverside County
DIGEST : This bill revises the disclosure form that must be
provided to prospective reverse mortgage borrowers and replaces
the written checklist that is currently required to be provided
to prospective reverse mortgage borrowers with a written
worksheet guide, whose content this bill specifies; and
prohibits 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 lapsed since
that borrower received reverse mortgage counseling.
CONTINUED
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ANALYSIS :
Existing federal law and regulation:
1.Defines 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.
2.Requires a creditor who issues a reverse mortgage to provide
specified disclosures to the borrower, informing the borrower
that he/she is not obligated to complete the reverse mortgage
transaction merely because he/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/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.
3.Provides 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.
4.Establishes, 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. Makes the HECM
loan available to persons 62 years of age and older and
provides 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. Provides, 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. Provides 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.
Requires any prospective heir to satisfy the lender's lien
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before taking title to the property.
5.Requires that all applicants for an insured HECM loan receive
adequate counseling from an independent third party that is
not, 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. Requires the lender, at the
time of initial contact, to provide the borrower with a list
of approved HUD counseling agencies.
Existing state law:
1.Defines a reverse mortgage as a nonrecourse loan secured by
real property, which meets all of the following criteria: (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; and
(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:
A. Before a lender may accept a final and complete
application for a reverse mortgage loan or assess any
fees, that lender must (1) refer the prospective borrower
to a housing counseling agency approved by HUD; (2)
provide the borrower with a list of at least 10 housing
counseling agencies approved by HUD, including at least
two agencies that can provide counseling by telephone;
(3) receive a certification from the applicant or the
applicant's authorized representative that the applicant
has received counseling from a HUD-approved counseling
agency; and (4) provide the borrower with a specified
notice and checklist, 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
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first complying with, or in the case of brokered loans
ensuring compliance with, existing law relating to the
translation of loan documents.
1.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. 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.
2.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.
3.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.
This bill:
1.Revises 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. States that it is important to understand
the terms of the reverse mortgage and its effect on the
borrower's future needs and that before entering into the
transaction, the borrower is required to consult with an
independent reverse mortgage loan counselor to discuss whether
or not a reverse mortgage is right for the borrower.
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2.Requires a reverse mortgage lender, before accepting a reverse
mortgage loan application from a prospective reverse mortgage
borrower, to provide that borrower with a written reverse
mortgage worksheet guide, in 14-point type or larger.
Provides that if a borrower seeks reverse mortgage counseling
before requesting a reverse mortgage loan application from a
reverse mortgage lender, the counseling agency is required to
provide the worksheet guide to the prospective borrower.
3.Specifies the wording of the reverse mortgage worksheet guide,
as follows:
A. The guide will 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 advises prospective borrowers that
they may speak openly and confidentially with a
professional reverse mortgage counselor that is independent
of the lender, who can help them understand what it means
for them to become involved with that particular loan.
B. The guide will include five questions, each of which
will 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 will be followed by the question,
"Do you need to discuss this with your counselor? Yes or
No." The five questions are:
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?
1.Prohibits a reverse mortgage lender from accepting a final and
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complete reverse mortgage loan application until at least
seven days have lapsed from the date of counseling, as
evidenced by the counseling certification.
2.Prohibits 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.
Background
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% in 2012, almost double the default
rate on traditional mortgages.
HECM . 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
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.
At present, only 2-3% of eligible homeowners currently have a
reverse mortgage. However, the graying of the baby boom
generation carries with it the potential that reverse mortgages
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will grow in popularity over the next two decades.
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, 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 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.
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. Although that report
does not reflect the recent changes to the HECM program
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summarized immediately above, it does provide valuable
information about the challenges facing seniors trying to decide
whether a reverse mortgage is right for them.
In issuing the report, 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 actions, as
necessary; and work with HUD to develop solutions to issues it
identified that are under HUD's jurisdiction.
According to the Senate Banking and Financial Institutions
Committee, 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.
Comments
According to the author's office, this bill helps seniors
evaluate whether or not a reverse mortgage is appropriate for
their needs by providing the necessary time and safeguards
needed for elderly clients who decide to proceed with these
types of loans.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local:
No
SUPPORT : (Verified 6/20/14)
Fair Housing Council of Riverside County (source)
AARP, Inc.
California Advocates for Nursing Home Reform
California Commission on Aging
California Retired Teachers Association
Center for Responsible Lending
Consumer Federation of California
Consumers Union
OPPOSITION : (Verified 6/20/14)
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National Reverse Mortgage Lenders Association
ARGUMENTS IN SUPPORT : According to the Fair Housing Council
of Riverside County, they are sponsoring this bill to better
protect reverse mortgage applicants. The worksheet guide whose
use this bill requires, and the additional time this bill
requires 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.
California Advocates for Nursing Home Reform 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 wary
of the possible downsides of these products and aware of some of
the negative aspects that may make them unsuitable for a
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/her mandatory reverse mortgage counseling
session."
ARGUMENTS IN OPPOSITION : The National Reverse Mortgage
Lenders Association (NRMLA) expressed concern that the wording
of the worksheet guide may not keep up with changes to the HECM
program. They state, "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
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senior from locking in an advantageous interest rate.
Further, NRMLA is concerned that "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."
ASSEMBLY FLOOR : 73-1, 4/24/14
AYES: Achadjian, Alejo, Ammiano, Atkins, Bigelow, Bloom,
Bocanegra, Bonilla, Bonta, Bradford, Brown, Buchanan, Ian
Calderon, Campos, Chau, Chávez, Chesbro, Conway, Cooley,
Dababneh, Dahle, Daly, Dickinson, Eggman, Fong, Fox, Frazier,
Beth Gaines, Garcia, Gatto, Gomez, Gonzalez, Gordon, Gorell,
Grove, Hagman, Hall, Roger Hernández, Holden, Jones,
Jones-Sawyer, Levine, Linder, Logue, Lowenthal, Maienschein,
Medina, Melendez, Mullin, Muratsuchi, Nestande, Olsen, Pan,
Patterson, Perea, V. Manuel Pérez, Quirk, Quirk-Silva, Rendon,
Ridley-Thomas, Rodriguez, Salas, Skinner, Stone, Ting, Wagner,
Waldron, Weber, Wieckowski, Wilk, Williams, Yamada, John A.
Pérez
NOES: Allen
NO VOTE RECORDED: Donnelly, Gray, Harkey, Mansoor, Nazarian,
Vacancy
MW:e 6/20/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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