BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                            



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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.


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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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