BILL ANALYSIS
AB 329
Page 1
Date of Hearing: April 14, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 329 (Feuer) - As Amended: April 13, 2009
SUBJECT : Reverse Mortgage Elder Protection ACT of 2009
KEY ISSUES :
1)Should state counseling requirements and cross-selling
consistent with the federal model, restrictions relating to
reverse mortgages be amended so that protections applicable to
federally-backed reverse mortgages apply to all reverse
mortgages?
2)given the rapid growth of reverse mortgages in recent years,
should senior citizens who are considering a reverse mortgage
receive more information about the associated risks and more
time to consider those risks?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill seeks to give greater consumer protections to senior
citizens considering a reverse mortgage. Reverse mortgages,
which have become more popular as baby boomers retire, were
designed to give persons of retirement age and with limited
income the opportunity to stay in their homes while converting
home equity into tax-free income or lump some payments. Unlike
a conventional "forward" mortgage where the borrower makes
payments to the lender to bring down debt and increase equity,
in a reverse mortgage the lender makes payments to the borrower
so that debt increases and equity decreases. While this is a
valuable option for many seniors, reverse mortgages are not for
everyone. Many seniors obtain mortgages that they may not need,
and both consumer advocates and responsible lenders agree that
such mortgages are risky when combined with annuities and other
insurance products. Still, there have been several reports of
senior citizens being persuaded to use reverse mortgage proceeds
to buy investment products from which they have little or no
chance to benefit. As a result, the sponsors argue, seniors are
losing equity in what is often their only asset: their home.
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This bill amends the state's existing reverse mortgage law so
that new federal counseling regulations and restrictions and
cross-selling mortgages and annuities will apply to
federally-backed and proprietary loans. In addition, this bill
imposes new notice requirements on lenders and requires
borrowers to acknowledge their understanding of the financial
consequences of the loan before closing. Finally, this bill
would increase the borrower's right to rescind from 3 days to 30
days, which mirrors the current rescission right for insurance
contracts sold to persons 65 years of age or older. The bill is
supported by several senior and consumer groups, nursing home
reform advocates and nursing home operators, the Trusts &
Estates Section of the State Bar, and professional fiduciaries.
It is opposed by financial institutions and mortgage lenders.
SUMMARY : Amends California reverse mortgage law to strengthen
existing counseling and cross-selling provisions and makes them
consistent with recent federal changes; extends the right of a
person to rescind a reverse mortgage contract; imposes a duty of
honesty, good faith, and fair dealing on lenders and originators
of reverse mortgages; and requires that specified information on
the risks and suitability of reverse mortgages be provided to
prospective borrowers. Specifically, this bill :
1)Prohibits a lender or any other person that participates in
the origination of a reverse mortgage from requiring the
prospective borrower to purchase an annuity as a condition of
obtaining a reverse mortgage loan.
2)Prohibits a lender or any other person that participates in
the origination of a reverse mortgage from doing either of the
following:
a) Participate in, be associated with, or employ any party
that participates in or is associated with any other
financial or insurance activity, unless the lender
maintains firewalls and other safeguards designed to ensure
that individuals participating in the origination of the
mortgage shall have no involvement with, or incentive to
provide the prospective borrower with, any other financial
or insurance product.
b) Refer the prospective borrower to anyone for the
purchase of an annuity or other financial or insurance
product.
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3)Permits the borrower to rescind any reverse mortgage within 30
days of execution by providing the lender with written notice
and returning any payments received in connection with the
reverse mortgage within 15 days of rescission.
4)Provides that prior to accepting a final and complete
application for a reverse mortgage the lender shall provide
the borrower with a list of not fewer than ten counseling
agencies that are approved by the United States Department of
Housing and Urban Development to engage in reverse mortgage
counseling. Provides further that the counseling agency shall
not receive any compensation, either directly or indirectly,
from the lender or from any other person or entity involved in
originating or servicing the mortgage or the sale of
annuities, investments, long-term care insurance, or any other
type of financial or insurance product.
5)Requires the lender, prior to counseling, to provide the
prospective borrower with a plain and conspicuous written
statement warning the prospective borrower of the legal and
financial implications of a reverse mortgage, a statement on
the risks associated with using reverse mortgage proceeds to
purchase annuities or other financial products, and notice
that the borrower has a 30-day right of rescission, as
specified.
6)Provides that a person who offers, sells, or arranges the sale
of a reverse mortgage owes the prospective borrower a duty of
honesty, good faith, and fair dealing, in addition to any
other obligation under law.
7)Requires a person who offers, sells, originates, or arranges
the sale of a reverse mortgage to provide the prospective
borrower with a written checklist, to be signed by the
prospective borrower and maintained by the lender,
acknowledging that the borrower has considered a number of
suitability factors.
8)Provides that if the lender has concerns about the suitability
of a reverse mortgage for a particular borrower, then the
lender shall convey those concerns to the borrower in writing.
Specifies, however, that nothing in this provision shall imply
that the lender has a legal duty to deny a reverse mortgage
for lack of suitability, so long as the borrower is otherwise
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qualified.
EXISTING FEDERAL LAW :
1)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 the 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
before taking title to the property. (12 USC Section 1715z-20
et seq.; 12 CFR Section 226.33.)
2)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. (12 USC Section 1715z-20
(d) (2); 24 CFR 206.41.)
3)Requires all HECM loan counselors to be approved by HUD and
meet HUD standards, as specified. Further requires the HUD
Secretary to develop uniform counseling protocols by July 30,
2009. Protocols shall require a qualified counselor to
discuss, generally, financial options other than a reverse
mortgage, the financial implications of reverse mortgages,
including any tax consequences, or the affect of the loan on
eligibility for government assistance programs. (12 USC
1715z-20 (f) (1)-(5); 24 CFR Section 214.103.)
4)Prohibits the lender or any person involved in the origination
of the HECM from participating in, being associated with, or
employing any party that participates in the sale of other
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financial or insurance products, unless the lender or
originator maintains firewalls and other safeguards designed
to ensure that individuals participating in the origination of
the HECM loan shall have no involvement with, or incentive to
provide the borrower with, any other financial or insurance
product. Specifies that a prospective borrower shall never be
required to purchase any other financial or insurance product
as a condition of obtaining a reverse mortgage. (12 USC
1715z-20 (n)-(o).)
EXISTING STATE LAW :
1)Defines "reverse mortgage" as a non-recourse loan secured by
real property that 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.
c) The loan is made by a lender licensed or chartered
pursuant to the laws of this state or the United States.
(Civil Code Section 1923.)
2)Establishes, consistent with federal HECM requirements, but
applicable to both HECM and non-HECM loans, certain
requirements for reverse mortgage loans, including a
prohibition on prepayment penalties and interest rate
disclosure requirements. (Civil Code Section 1923.2.)
3)Prohibits a lender from requiring the prospective borrower
from requiring the purchase of an annuity as a condition of
obtaining a reverse mortgage. Provides further that a lender
or broker arranging a reverse mortgage loan shall not (a)
offer an annuity to the borrower prior to the closing of a
reverse mortgage or any right of rescission or (b) refer the
borrower to anyone for the purchase of an annuity prior to the
closing of the reverse mortgage. (Civil Code Section 1923.2
(i).)
4)Requires the lender to refer the prospective borrower, prior
to accepting a final and complete application for a reverse
mortgage, to a HUD-approved counseling agency. Further
requires the lender to provide the prospective borrower with a
list of at least five HUD-approved counseling agencies, at
least two of which provide counseling by telephone. Further
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provides that the lender shall not accept a final application
or assess any fees upon the borrower without first obtaining a
certification that the prospective borrower has received
counseling from a HUD-approved counselor, and that the
certification is signed by both the borrower and the
counselor, as specified. (Civil Code Section 1923.2 (j).)
5)Requires, consistent with Civil Code Section 1632, that if the
reverse mortgage is negotiated primarily in Spanish, Chinese,
Tagalog, Vietnamese, or Korean, that the lender must provide a
written translation of the agreement in the language in which
the contract or agreement was negotiated, as specified.
(Civil Code Sections 1923.2 (l) and 1632(b).)
6)Requires the lender to provide an applicant for the reverse
mortgage with a plain language statement in conspicuous
16-point font type or larger notifying the applicant that a
reverse mortgage is a complex financial transaction that uses
the acquired equity in the home and informs the borrower of
the independent counseling requirement. (Civil Code Section
1923.5.)
7)Provides, to the extent consistent with federal law, that
reverse mortgage loan payments shall 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. (Civil Code Section 1923.9.)
COMMENTS : The last decade has seen an explosion in the reverse
mortgage market. Reverse mortgages allow persons 62 years of
age of older to convert home equity into tax-free monthly income
or a lump sum cash payment to spend as they wish. In a
conventional "forward" mortgage, the borrower makes payments to
the lender so that debt decreases and equity increases. In a
"reverse" mortgage, the lender makes payments to the borrower so
that debt increases and equity decreases. The borrower
generally does not repay the loan until the last borrower dies,
sells the home, or moves out. However, a lender may demand
repayment if the borrower fails to pay property taxes or allows
the home to fall into disrepair. Most reverse mortgages are
insured by the Federal Housing Administration (FHA) through the
Home Equity Conversion Mortgage (HECM) program administered by
the U.S. Department of Housing & Urban Development (HUD). These
federally-backed loans must meet certain requirements, including
independent third party counseling by a HUD-approved housing
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agency. Though fewer in number, so-called "proprietary" reverse
mortgages are not federally insured and are not subject to the
same restrictions and requirements as the HECM loans. Yet, for
the most part, they operate the same way: the borrower receives
payments against the home equity, and the loan generally does
not become due until borrower dies, moves out, or sells the
home.
For many "cash poor, equity rich" seniors, a reverse mortgage
makes good economic sense. But reverse mortgages can also be
very costly. In addition to higher-than-usual origination fees,
closing costs, compound interest, and servicing fees, the
borrower is also required to pay an insurance premium (worth
about 2% of the loan) that protects the lender in case the value
of the property falls below the amount owed on the loan. The
total annual cost of a reverse mortgage is generally much
greater the shorter the loan period. For example, the hoped for
advantages of a reverse mortgage backfires if a senior becomes
ill or takes a fall and is forced to move out of the home early.
Leaving the home makes the loan come due, and the senior must
repay the high up-front costs and compounded interest while
having received little or no benefit.
Often, according to groups like AARP and Consumers' Union,
senior citizens are unaware that their financial needs may be
met by alternative and less costly means. For example, for
smaller and immediate needs, the borrower can obtain a home
equity line of credit. If the senior is obtaining a reverse
mortgage in order to pay property taxes, they may not be aware
of local and state property tax deferral programs available to
seniors with fixed incomes. Finally, where a senior lacks funds
to pay for increased medical costs, they may be eligible for
other forms of government aid, including Medi-Cal. While
reverse mortgages often provide a valuable tool for some senior
citizens, there are often more appropriate alternatives. AARP,
for example, while generally praising the benefits of reverse
mortgages in appropriate situations, generally recommends
exploring all other options before obtaining mortgages that may
not be needed and will eventually deplete home equity.
Moreover, AARP advises that using reverse mortgage proceeds to
buy annuities or invest in other products is almost never a good
idea. Even lending institutions are coming to agree that
reverse mortgage proceeds should not be used to invest in other
financial products; yet the practice continues, as numerous
reports and law suits attest.
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The Growth of the Reverse Mortgage Market and Previous
Legislative Responses : Although proprietary reverse mortgages
in some form or another have been around since at least the
1960s, it was not until the development of the federal HECM
reverse mortgages in the late 1980s and early 1990s that they
became well known. However, the federal program remained
relatively small and stagnant until 2003, when the number of
reverse mortgages suddenly sky-rocketed and became the fasting
growing sector of the mortgage lending industry. The reason for
this rapid growth is not entirely clear, though most reports
point to more aggressive marketing; rising home values; the
aging of the population; and the collapse of the sub-prime
lending crisis pushing brokers, lenders, and loan originators
into the reverse mortgage market. (See e.g. "Demand for Reverse
Mortgages Climbs," Wall Street Journal, January 22, 2009; "Shady
Subprime Lenders Creeping into Federal Mortgage Program,"
Financial Week, January 12, 2009; "Reverse Mortgages: Bad Rap or
Bad Idea?, San Francisco Chronicle, August 1, 2008.) While this
growth may be subject to fluctuations, overall growth is
expected to continue as the population ages.
The first response to this growth in California came with the
enactment of AB 456 (Chapter 797, Stats. of 1997), which defined
"reverse mortgage" and set out minimum requirements that more or
less mirrored then prevailing federal requirements. (Civil Code
Section 1923 et seq.) While the federal requirements applied
only to the HECM loans, the California provisions apply to both
federally-backed and so-called proprietary loans that are not
subject to HECM requirements. More recently AB 1609 (Chapter
202, Stats. of 2006) added counseling requirements and
restrictions bundling reverse mortgages and annuities (at least
until after the closing and any right of rescission), that again
mirrored federal regulations but applied to HECM and proprietary
loans. AB 1609 also added other requirements, including
providing a notice that reverse mortgages were complex financial
transactions and requiring lenders to comply with Civil Code
Section 1632, which requires translation of contracts into the
language of negotiation if it was one of five specified
languages common in California.
This bill seeks to bring California law into line with the most
recent federal changes, specifically by incorporating recent
federal changes relating to counseling and cross-selling. In
addition the bill will also provide borrowers with more
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information on the financial consequences and risks associated
with reverse mortgages, and it will extend the right of
rescission from three to thirty days. These provisions seek to
address the following issues:
The Use of Reverse Mortgage Proceeds to Buy Annuities and Other
Financial Products : Reverse mortgages are especially risky when
proceeds are used to purchase annuities or related financial
investment products. In its 2007 consumer guide, AARP concludes
unequivocally that:
Investing the money you get from a reverse mortgage is
not wise. It is extremely unlikely that you could
safely earn more from an investment than the loan
would cost. Besides, the funds you do not spend from
a HECM credit line grow larger at a greater rate than
you could safely earn. . . . Be wary of anyone who
wants to sell you something, and suggests a reverse
mortgage as a way to pay for it.
Although existing state and federal law prohibits lenders from
requiring the purchase of an annuity as a condition of obtaining
a reverse mortgage, until recently it was not unlawful for a
lender or loan originator (i.e. the salesperson or broker that
offers and/or arranges the loan) to encourage the borrower to
obtain a reverse mortgage in order to use proceeds to purchase a
deferred annuity. As the AARP consumer guide notes, this is
almost never a good idea, especially for seniors of more
advanced years, since it is highly unlikely that any payout will
likely be exceeded by the high costs of the reverse mortgage and
the loss of equity to pay principal and interest.
Moreover, as evidenced by a number of lawsuits initiated in
California in recent years, some unscrupulous salespersons and
originators have encouraged seniors of advanced years to obtain
reverse mortgages and purchase annuities that did not mature
until well after the borrower's life expectancy. Although many
of these lawsuits, alleging various causes of action from common
law fraud to elder financial abuse, are still pending or have
been summarily dismissed in favor of the lenders, they
illustrate both the kinds of problems that can arise and the
general lack of remedies in existing law. (See e.g. the
following pending cases: Carol Anthony v. Financial Freedom
Senior Funding Corp. et al., Case No. M79107, Monterey County
Superior Court; Andrew Bankhead v. Superior Life Insurance
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Services, et. al., Case No. BC399761, Los Angeles County
Superior Court; and Estate of Eileen Bernard, et. al. v. Wells
Fargo Home Mortgage, Inc. et. al. Case No.
37-2008-00083560-CU-FR-CTL, San Diego County Superior Court.;
see also the following appellate court cases arising in
California: Mary Munoz v. Financial Freedom (2008) 573 F. Supp.
2d 1275; Black v. Financial Freedom(2001) 92 Cal. App. 4th 917.)
Incorporation of Recent Changes in Federal Counseling
Regulations : Federal rules governing HECM loans were recently
changed in attempt to eliminate certain conflicts of interest
created when lenders pay counseling fees or direct borrowers
toward favored counseling agencies. AB 329 incorporates these
recent federal changes rules to require all lenders to provide
borrowers with a list of not fewer than ten HUD-approved
counseling agencies. The purpose of this change is to allow the
borrower to choose a counseling agency of his or her choice and
to prevent lenders and loan originators from steering borrowers
toward favored counseling agencies that will be more likely to
encourage the borrower to take the loan. In addition, AB 329
seeks to eliminate potential conflicts of interest by
prohibiting the counseling agency from receiving compensation
from lenders, loan originators, or any person or entity selling
annuities or related financial products. These provisions draw
upon the precise language of recent changes in federal law
regulating HECM loans. This bill will not only bring state law
into conformity with federal law, but it will also ensure that
these much-welcomed federal protections will apply to both HECM
and non-HECM loans.
"Cross Selling :" AB 329, again incorporating recent federal
changes, will prohibit all lenders from participating in the
sale of other financial or insurance products, or having any
affiliation with, or employing salespersons or originators who
have any affiliation with, persons or entities engaged in the
sale of other financial or insurance products, unless the lender
maintains appropriate firewalls that eliminate any incentive on
anyone's part to encourage the borrower to use the proceeds of
the reverse mortgage to purchase annuities and related products.
As with the counseling requirements, these provisions of AB 329
will not only ensure that state law conforms to recent federal
rule changes, but also that federal protections apply to both
HECM and non-HECM loans.
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Lender Duties : Because, almost by definition, reverse mortgage
lenders deal with senior citizens, AB 329 provides that a
reverse mortgage lender shall owe to the prospective borrower a
duty of honesty, good faith, and fair dealing. This duty is
identical to that already required in existing law for persons
who sell insurance products to persons 65 years of age or older
(Insurance Code Section 785), and reflects the fact that some
senior citizens, though by no means all, may find complex
financial transactions confusing. The assumption is that they
are entitled to something beyond the usual morals of the
marketplace, an assumption that is also reflected in other
statutes, most notably the elder financial abuse statute.
(Welfare & Institutions Code Section 15610.30) In addition to
this general duty, this bill would also require lenders to
provide certain notices. AB 329 would enhance the notice
required by existing law by requiring additional information
about using reverse mortgage proceeds to purchase annuities and
related products and information on the borrower's right of
rescission.
Suitability Checklist : In order to ensure that all borrowers
have been counseled on, and have considered, some of the most
important consequences of a reverse mortgage, AB 329 requires
the lender, after counseling but prior to closing, to provide
the borrower with a checklist, to be signed by the borrower,
acknowledging that he or she has considered a number of factors,
including actual loan costs, alternatives to reverse mortgages,
the effect of having to leave the home earlier than anticipated,
and the impact that a reverse mortgage may have on tax
obligations, eligibility for aid programs, and non-borrowing
residents and heirs. Contrary to the claims of the opponents,
this checklist is not duplicative of the counseling requirement,
nor does it require the lender to make any factual determination
or inquiry on any of the enumerated factors. It is simply an
opportunity for the borrower to acknowledge that he or she has
been counseled on or considered these factors. It provides a
"last best chance" for the borrower to reconsider. AB 329 also
provides that, if the lender has any concerns about the
suitability of a reverse mortgage for a particular borrower,
then these concerns should be conveyed to the borrower in
writing. However, this provision applies on "if" the lender has
concerns, and AB 329 expressly specifies that nothing in this
provision implies a legal duty on the lender to deny a reverse
mortgage application for lack of suitability if the borrower
elects to go forward.
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Right of Rescission : Finally, AB 329 extends the right of
rescission from three to 30 days. Existing law gives a person
65 years of age or older 30 days after execution to rescind an
insurance contract. This right of rescission, as with the other
laws protecting elders from potential financial abuse, reflects
the fact that some senior citizens may have difficulty
understanding complex financial transactions, may be vulnerable
to high pressure sales tactics, and may need more time to
consult with family members or others about implications of
their decision. Needless to say many senior citizens have a
better understanding of financial transactions than many younger
legislators or committee staff, but it has also been
well-documented that advanced age is associated with changes in
cognitive ability. Although reverse mortgage products obviously
differ substantially from insurance products, the rationale for
making the right of rescission the same reflects the fact that
reverse mortgages are sometimes ill-advisedly used to purchase
annuities and other insurance products. Under existing law, a
person who obtains a reverse mortgage to purchase an annuity has
30 days to rescind the annuity, but only three days to rescind
the reverse mortgage. Thus, for example, under existing law a
person who decides to cancel an annuity 15 days after execution,
would be able to rescind the annuity but not the reverse
mortgage that was bought for the purpose of buying the annuity.
Existing federal law, under the Truth in Lending Act, permits a
three day right of rescission for any federally-insured loan
that is secured by the borrower's principal dwelling. This rule
would include a reverse mortgage, though it applies to any loan
secured against a principal dwelling. Because the 30-day right
of rescission in AB 329 applies only to a specific category of
loans secured by principal dwelling, it would not conflict with
the federal right of rescission. Moreover, courts have held
that state laws that offer more protection than the federal
Truth in Lending Act are not preempted by federal law. (See
e.g. Black v. Financial Freedom, supra, at 936.)
ARGUMENTS IN SUPPORT : According to the California Advocates for
Nursing Home Reform (CANHR), one of the co-sponsors of this
bill, AB 329, as proposed to be amended, provides modest but
necessary changes to the existing law that will "assist many
seniors in avoiding the devastating effects of an unsuitable
reverse mortgage loan." According to CANHR, some of the adverse
consequences of an inappropriate yet high cost reverse mortgage
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include exhausting home equity that might be needed later to pay
for assisted living or needed home repairs; falling prey to
"financial scammers who connive to get [seniors] to pull out
home equity in order to fund financial adventures;" or
discovering that the reverse mortgage becomes due earlier than
anticipated if forced to move out for an extended period of time
due to an unexpected illness or accident.
In addition, CANHR argues that even though seniors are told in
lender advertisements that they will never have to leave their
home or worry that it will be foreclosed upon, "[t]his is not
altogether true,' adding that "Borrowers with reverse mortgages
can and do get foreclosed upon. If they can't keep up with the
continual financial payments for insurance, property taxes, and
maintenance of the home the loan goes into default." CANHR
concedes that while reverse mortgages are appropriate for some
seniors, "these types of loans should be used judiciously."
Finally, CANHR adds that the state of California has an interest
in assuring that only suitable reverse mortgages are sold, since
seniors who have lost all of their home equity - in many cases
their only asset - will become economically dependent. Without
any assets, seniors who are no longer capable of living
independently may have no other option than relying upon
Medi-Cal for expensive nursing home care.
The California Alliance for Retired America (CARA), another
co-sponsor of this bill, similarly concedes - as does the author
and all of the supporters - that reverse mortgages can be a
source of financial security for seniors and provide many
benefits. Thus, CARA has no desire to diminish the availability
of such loans when suitable. However, CARA contends that "often
seniors do not really understand what they are purchasing when
they agree to the terms of a reverse mortgage." CARA concedes
that federal and state law already provides a number of
protections, including the requirement for independent
counseling, but that this counseling is often "riddled with
conflicts of interest." AB 329, according to CARA, will correct
deficiencies in existing law, bring state law into conformity
with recent federal protections and extend them to "all lenders,
not just FHA-backed lender," and will generally add "important
additional safeguards for seniors contemplating a reverse
mortgage."
Aging Services of California (ASG), an association of non-profit
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providers of senior housing, assisted elderly living, and
skilled nursing care, supports this bill because reverse
mortgages are "expensive sources of capital that are often
ill-advised," given the particular situation of the borrower.
ASG compares the boom in reverse mortgages to the recent
sub-prime crisis: "Like sub-prime loans, reverse mortgages
incorporate the same predatory incentives that motivated the
sellers of bad sub-prime loans; which are characterized by high
transaction fees paid by the borrower to the seller up front and
a richly insured loan virtually guaranteeing no loss to the
lender." With seniors holding more than $4 trillion in home
equity, ASG contends, the same people who "produced the
sub-prime mortgage catastrophe are out of work . . . [and] have
their sights set on selling more reverse mortgages to senior age
homeowners regardless of whether such loans are suitable for the
borrower or not." ASG concludes that "AB 329 provides modest,
but essential, protections to help assure that reverse mortgage
borrowers know and understand the full ramifications of
borrowing under a reverse mortgage."
A number of other consumer and senior groups, listed below,
support AB 329 for reasons cited above, but make a number of
additional points. The Center for Responsible Lending (CRL)
points out that "the rapid expansion of reverse mortgages has
been accompanied by aggressive marketing and reports of abuse,
especially when reverse mortgages are marketed along with
annuities, long-term insurance, or other financial investment
products." The American Association of Retired Persons (AARP)
similarly supports this bill because "in the current economy,
reverse mortgages are increasingly popular." AARP supports
reverse mortgages when they are used "as a last resort" for
seniors who have no other financial resources and want to live
independently. However, AARP points out that its studies have
found "that many older [persons] have been pressured into
obtaining mortgages that they don't really need and that deplete
the equity in their single greatest asset: their home." AARP
also notes that, the fact that two-thirds of Americans 65 and
older own their homes free and clear creates a lucrative market
for reverse mortgages, but that seniors should "understand what
they are getting into."
The Trust and Estates Section of the California State Bar
(TEXCOM) supports AB 329 as a logical extension of the elder
financial abuse provisions in existing law. (Welfare &
Institutions Code Section 15610.30.) According to TEXCOM, this
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bill will supplement those elder protections, noting that
existing regulations and protections are often "diluted by
aggressive marketing" of reverse mortgages. TEXCOM is
especially concerned about the effect of reverse mortgages on
overall estate planning. While reverse mortgages can be an
important tool in estate planning, TEXCOM's practicing attorneys
often find that their elderly clients are unaware of the effects
of a reverse mortgage, which may, for example, prevent the
transfer of the property to a trust.
The Consumer Attorneys of California support this bill because
it "provides increased protections to an acutely vulnerable
group of California consumers." The Professional Fiduciary
Association of California similarly supports the bill because it
will provide "protections for the most vulnerable in our state
and accountability from those who provide [reverse mortgages.]"
ARGUMENTS IN OPPOSITION : This bill is opposed by
representatives of the banking and mortgage lending associations
listed below, as well as the California Chamber of Commerce.
Although much of their joint letter of opposition raises
concerns about the "fiduciary duty" and "cause of action"
provisions that have been taken out of the bill, many of their
objections apply to both the bill as introduced and the bill as
amended. In general, the opponents contend that this bill would
greatly reduce the availability of a very worthwhile product,
and would generally have a "negative impact on reverse mortgage
lending and on seniors seeking reverse mortgages in a
residential housing market that has already experienced a deep
downward cycle."
Opponents especially object to extending the right of rescission
to thirty days, which they claim is both unnecessary and, as a
practical matter, unworkable. First, opponents argue that this
will only delay a senior citizen's ability to obtain needed
funds, even if those funds are needed for an emergency. Second,
opponents also point out that once reverse mortgage funds "are
released and/or used to pay existing mortgage liens, attempting
to recoup the funds [after thirty days] . . . could be very
difficult and likely have the effect of simply reducing or
delaying the availability of funds . . . because there is no
assurance that lenders can recoup those funds." Opponents have
also informed the Committee that the amended version of the bill
does not clearly specify whether a lender would be required to
release funds once the loan is completed, or if they would be
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required, or permitted, to withhold the funds until the right of
rescission has passed. Finally, opponents have informed the
Committee that the 30-day right of rescission is unnecessary in
light of the other state and federal protections, including the
counseling, notice, and checklist requirements. (However, it
should be noted that the opponents object to, or have concerns,
with those provisions as well.)
Opponents are concerned that this bill, both in its introduced
and amended form, would ultimately make lenders liable for
establishing "suitability standards" for reverse mortgage loans.
Although the amended version of this bill eliminates the
fiduciary duty and cause of action, it is apparent that the
opponents believe that this bill will produce essentially the
same result, even if that is not its intent. Fiduciary duties,
the opponents point out, have traditionally been imposed on
brokers who act as the borrower's agent in order "to obtain a
loan made by a third party," whereas in the reverse mortgage
context "the borrower has identified a lender, and the lender
acts as a principal, not as an agent for another." Although the
amended bill has removed the fiduciary duty, the opponents
believe that the lesser duty of "honesty, good faith, and fair
dealing," when read in conjunction with the bill's other
provisions, may imply liability if a lender does not conduct a
suitability analysis and/or deny a loan if it can be deemed
"unsuitable." This certainly does not appear to be the author's
intent, and there is nothing in the plain language of the bill
to suggest such a duty. Nevertheless, the opponents fear that a
court may construe this to be implicit in the entirety of
proposed new Section 1923.8. They fear, in fact, that this duty
will create liability on the part of the lender merely because
the loan did not meet the borrower's expectation, or was not the
best loan that the borrower could have obtained.
While the opponents raise important questions that the Committee
may wish to consider , it should be reiterated that the bill does
not in fact require the lender to conduct any suitability
determination and expressly states there is no implied legal
duty to deny a loan for lack of suitability, so long as the
borrower is otherwise qualified for the loan. The bill only
requires that the lender provide the borrower with a checklist
that seeks to ensure that the borrower has considered specified
important factors in making the decisions to enter into a
reverse mortgage.
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REGISTERED SUPPORT / OPPOSITION :
Support
California Advocates for Nursing Home Reform (co-sponsor)
California Alliance for Retired Americans (co-sponsor)
Aging Services of California
American Association of Retired Persons (AARP) - California
American Federation of State, County and Municipal Employees
(AFSCME)
Center for Responsible Lending
Congress of California Seniors
Consumer Attorneys of California
Professional Fiduciary Association of California
Trusts & Estates Section of the California State Bar
Opposition
California Bankers Association
California Chamber of Commerce
California Financial Services Association
California Independent Bankers
California Mortgage Bankers Association
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334