BILL ANALYSIS Ó AB 1700 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 1700 (Medina) As Amended August 7, 2014 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |73-1 |(April 24, |SENATE: |35-0 |(August 13, | | | |2014) | | |2013) | ----------------------------------------------------------------- Original Committee Reference: B. & F. SUMMARY : Prohibits a reverse mortgage lender from accepting a reverse mortgage application until seven days have passed from the date of mandatory loan counseling. Specifically, this bill deletes the current requirement that the lender provides the borrower with a specific checklist prior to counseling, and instead provides a reverse mortgage worksheet guide in at least 14-point font. The Senate amendments make technical changes to clarify terms and intent. EXISTING LAW : 1)Requires a reverse mortgage to comply with the following requirements (Civil Code Section 1923.2): a) Prepayment, without penalty, must be allowed at any time; b) The reverse mortgage may become payable and due under certain circumstances; c) The lender must prominently disclose in the loan agreement any interest rate or other fees to be charged during the period that commences on the date that the reverse mortgage loan becomes due; d) A lender or any other person that participates in the origination of the mortgage shall not require the applicant to also purchase an annuity; e) Prohibits the lender from participating in, or be associated with any other financial or insurance activity, AB 1700 Page 2 unless the lender maintains procedural safeguards that ensure that the originator of the reverse mortgage has no involvement, or incentive to provide the borrower with any other financial or insurance product; f) Prohibits the lender from referring the borrower to anyone for purchase of annuity or other financial product; g) The lender must provide a prospective borrower with a list of not fewer than 10 United States Department of Housing and Urban Development (HUD) certified counseling agencies; and, h) Provides that the lender shall not accept a final and complete application for a reverse mortgage from the prospective applicant unless they first receive from the applicant certification that they have received counseling from a HUD certified counseling agency. 2)No reverse mortgage loan application shall be taken by a lender unless the loan applicant, prior to receiving counseling, has received from the lender the following plain language statement in conspicuous 16-point type or larger font, advising the prospective borrower about counseling prior to obtaining the reverse mortgage loan: IMPORTANT NOTICE TO REVERSE MORTGAGE LOAN APPLICANT 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. BEFORE ENTERING INTO THIS TRANSACTION, YOU ARE REQUIRED TO CONSULT WITH AN INDEPENDENT LOAN COUNSELOR. A LIST OF APPROVED COUNSELORS WILL BE PROVIDED TO YOU BY THE LENDER. SENIOR CITIZEN ADVOCACY GROUPS ADVISE AGAINST USING THE PROCEEDS OF A REVERSE MORTGAGE TO PURCHASE AN ANNUITY OR RELATED FINANCIAL PRODUCTS. IF YOU ARE CONSIDERING USING YOUR PROCEEDS FOR THIS PURPOSE, YOU SHOULD DISCUSS THE FINANCIAL IMPLICATIONS OF DOING SO WITH YOUR COUNSELOR AND FAMILY MEMBERS. 3)Pursuant to Civil Code Section 1923.5 no reverse mortgage loan application shall be taken by a lender unless the lender AB 1700 Page 3 provides the prospective borrower, prior to his or her meeting with a counseling agency on reverse mortgages, with a written checklist, or in the event that the prospective borrower seeks counseling prior to requesting a reverse mortgage loan application from the reverse mortgage lender, the counseling agency shall provide the prospective borrower with a written checklist. The written checklist shall conspicuously alert the prospective borrower, in 12-point font or larger, that he or she should discuss with the agency counselor the following issues: a) How unexpected medical or other events that cause the prospective borrower to move out of the home, either permanently or for more than one year, earlier than anticipated will impact the total annual loan cost of the mortgage; b) The extent to which the prospective borrower's financial needs would be better met by options other than a reverse mortgage, including, but not limited to, less costly home equity lines of credit, property tax deferral programs, or governmental aid programs; c) Whether the prospective borrower intends to use the proceeds of the reverse mortgage to purchase an annuity or other insurance products and the consequences of doing so; d) The effect of repayment of the loan on non-borrowing residents of the home after all borrowers have died or permanently left the home; e) The prospective borrower's ability to finance routine or catastrophic home repairs, especially if maintenance is a factor that may determine when the mortgage becomes payable; f) The impact that the reverse mortgage may have on the prospective borrower's tax obligations, eligibility for government assistance programs, and the effect that losing equity in the home will have on the borrower's estate and heirs; and, g) The ability of the borrower to finance alternative living accommodations, such as assisted living or long-term care nursing home registry, after the borrower's equity is AB 1700 Page 4 depleted. 4)The checklist required in 1) above, shall be signed by the agency counselor, if the counseling is done in person, and by the prospective borrower and returned to the lender along with the certification of counseling required under Civil Code Section 1923.2(k), and the loan application shall not be approved until the signed checklist is provided to the lender. A copy of the checklist shall be provided to the borrower. FISCAL EFFECT : None COMMENTS : The key component of this bill are the requirements that a borrower must wait seven days from the day of counseling prior to turning in a final reverse mortgage loan application, and that the lender must provide the borrower with a reverse mortgage worksheet guide that is designed to address the various responsibilities and consequences of a reverse mortgage. The justification for this seven day cooling off period is to give time to the potential borrower to consider the issues that are discussed during counseling and highlighted in the worksheet prior to entering into the complexities of a reverse mortgage. The vast majority of reverse mortgages are insured by the Federal Housing Administration (FHA) as part of its Home Equity Conversion Mortgage (HECM) program. The FHA insurance guarantees that borrowers will be able to access their authorized loan funds in the future (subject to the terms of the loan), even if the loan balance exceeds the value of the home or if the lender experiences financial difficulty. Lenders are guaranteed that they will be repaid in full when the home is sold, regardless of the loan balance or home value at repayment. Borrowers or their estates are not liable for loan balances that exceed the value of the home at repayment - FHA insurance covers this risk. Today, the market for reverse mortgages is very small. Only about 2% to 3% of eligible homeowners choose to take out a reverse mortgage. Only about 582,000 HECM loans are outstanding as of November 2011, as compared to more than 50 million traditional mortgages and more than 17 million home equity loans and lines of credit. But reverse mortgages have the potential to become a much more prominent part of the financial landscape in the coming decades. In 2008, the first baby boomers became eligible for reverse mortgages. The baby boom generation (48- AB 1700 Page 5 to 66-year-olds in 2012) includes more than 43 million households, of which about 32 million are homeowners. As of 2009, the median home equity for baby boomer households was $108,000. Many boomers may find that they will need to use their home equity in order to maintain the lifestyle they expect to have in retirement. Many of the original product design concepts for the HECM program were developed during the 1980s by private companies offering proprietary (non-government insured) reverse mortgages of various types. Throughout the 1990s, when the HECM program was still a small pilot, and again in the mid-2000s, in the midst of the housing boom, a range of proprietary products were available in the marketplace. For most consumers, however, the HECM offered a better value. Today, only one lender offers a proprietary product, which accounts for only a handful of loans per year. The HECM program determines how much can be borrowed based on the value of the home, prevailing interest rates, and the age of the borrower (or youngest co-borrower). The loans require no monthly mortgage payments. Interest and fees are added to the principal balance each month, resulting in a rising loan balance over time. Borrowers may remain in the home indefinitely, even if the loan balance becomes greater than the value of the home - so long as the borrower meets certain conditions. In return for this protection, and protection against the possibility that their lender fails to make loan disbursements as agreed, borrowers pay a mortgage insurance premium (MIP) to FHA. HECM borrowers have several options as to the structure of the MIP, the interest rate type (fixed or adjustable), and the way that they receive their loan proceeds. The range of options has increased in recent years, adding to the difficulty of the choices that prospective borrowers have to make around what is already a complex product. Prospective borrowers are required to attend mandatory pre-loan counseling, but the counseling may not be sufficient to fully equip prospective borrowers to make good decisions. A majority of reverse mortgage borrowers report satisfaction with the product. A 2006 AARP survey found that the product completely met their needs (58%) or mostly met their needs (25%). Additionally, 79% of respondents said that the reverse mortgage helped them stay in their home, and 87% said it AB 1700 Page 6 improved their quality of life. Over the last decade more borrowers take more cash up front than in years previous. By 2008, the median borrower was taking out 88% of loan proceeds within the first year. Previous legislation: AB 329 (Feuer), Chapter 236, Statutes of 2009, provided that a lender or any other person that participates in the origination of a reverse mortgage shall not participate in, or be associated with, or employ any party that participates in or is associated with any other financial or insurance activity, unless the lender maintains certain safeguards or refer prospective borrowers to anyone for purchase of financial or insurance products. AB 553 (Medina) of 2013, was very similar to this bill except that it required that the potential borrower not receive counseling until at least seven days elapsed since their contact with the lender. AB 553 died in the Assembly Banking and Finance Committee, pursuant to Article IV, Section 10(c) of the California Constitution. Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081 FN: 0004531