BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1700
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          CONCURRENCE IN SENATE AMENDMENTS
          AB 1700 (Medina)
          As Amended  August 7, 2014
          Majority vote
           
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          |ASSEMBLY:  |73-1 |(April 24,      |SENATE: |35-0 |(August 13,    |
          |           |     |2014)           |        |     |2013)          |
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           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,  








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               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  








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            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  








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               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-  








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          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  








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          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


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