BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 1700| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 1700 Author: Medina (D), et al. Amended: 8/7/14 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. Senate Floor Amendments of 8/7/14 add a coauthor; and make CONTINUED AB 1700 Page 2 technical changes. 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. CONTINUED AB 1700 Page 3 Requires any prospective heir to satisfy the lender's lien 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. CONTINUED AB 1700 Page 4 B. No lender may make a reverse mortgage loan without 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. CONTINUED AB 1700 Page 5 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? CONTINUED AB 1700 Page 6 1.Prohibits a reverse mortgage lender from accepting a final and 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 CONTINUED AB 1700 Page 7 generation carries with it the potential that reverse mortgages 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 CONTINUED AB 1700 Page 8 does not reflect the recent changes to the HECM program summarized immediately above, it does provide valuable information about the challenges facing seniors trying to decide whether a reverse mortgage is right for them. 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 8/8/14) 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 CONTINUED AB 1700 Page 9 OPPOSITION : (Verified 8/8/14) 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 CONTINUED AB 1700 Page 10 circumstances, the requirement to wait a week could prevent a 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 8/8/14 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED