BILL ANALYSIS
AB 329
Page 1
Date of Hearing: April 21, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 329 (Feuer) - As Amended: April 16, 2009
As Proposed to be Amended
SUBJECT : Reverse Mortgage Elder Protection ACT of 2009
KEY ISSUES :
1)consistent with federal law, Should state counseling and
cross-selling requirements 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 reportedly obtain mortgages that they
may not need, and both consumer advocates and senior groups
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
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argue, seniors are losing equity in what is often their only
asset: their home. 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; extends the
borrower's right to rescind a reverse mortgage to 30 days; and
requires lenders to provide specified information on the risks
and suitability of reverse mortgages 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 of
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)Requires a lender, prior to counseling, to provide a
prospective borrower with a written checklist pertaining to
the risks and suitability of a reverse mortgage. Requires
further that the borrower and counselor sign the checklist
acknowledging that the items have been discussed in counseling
and the checklist be returned to the lender, along with the
required counseling certificate, prior to closing.
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
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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
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 :
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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
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
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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
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 the borrower dies, moves out, or sells the
home.
For many "cash poor, equity rich" seniors, a reverse mortgage
often appears to make good economic sense. But reverse
mortgages can also be very costly. In addition to
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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
better 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 some lending institutions are reportedly in
agreement 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.
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
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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 concerning 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. 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 also seeks to provide
borrowers with more 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 : As noted above, 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
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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
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 an 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
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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.
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, prior to counseling, to provide the borrower with a
checklist that must be signed by the borrower and counselor,
acknowledging that counseling has covered specified topics,
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
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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 only "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.
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 the 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.)
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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
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
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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
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
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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
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.
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
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release funds once the loan is completed, or if they would be
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.)
Amendments Appear to Mostly Address Opponents Concern about
Lenders' Duties: Opponents also had expressed concerns that the
two earlier versions of the bill would make lenders liable for
establishing "suitability standards" for reverse mortgage loans.
Although the amended version of this bill eliminated any
express fiduciary duty, opponents continue to express concern
that even a "suitability checklist" might imply a duty on the
part of lenders to develop suitability criteria. However, the
bill as mostly recently amended has sought to take these
concerns into account and makes it clear that the lenders only
duty is to provide the checklist prior to the counseling session
so that critical issues will be considered during counseling.
Thus the current version of the bill creates no duty on the
lender to conduct a suitability determination or deny a loan for
lack of suitability, so long as the borrower is otherwise
qualified for the loan.
Ambiguities in Existing Federal Language : Opponents express
other concerns as well, including pertaining to the language in
the bill that is drawn from recent federal rules. For example,
federal rules preclude a lender from making referrals to, or
generally having associations with, parties that sell annuities
and "other financial and insurance products." Opponents contend
that this language would conceivably prohibit a lender who has
offered a borrower a reverse mortgage from offering the same
borrower a checking account (which is a "financial product") to
which to have monthly proceeds deposited. Opponents therefore
are concerned that the term "financial product" may be
interpreted broader than what the cross-selling prohibitions are
intended to accomplish. (It may be, for example, that
"investment product" would be a narrower and, given the intent
of the recent federal changes, a more appropriate term than
"financial product.") However, it should be stressed that if
the term "financial product" is overly broad, as opponents
contend, it is a product of federal law; where the term is used
in this bill, it is only in those provisions that intend to
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track federal law. Nonetheless, the author is committed to
continue working with the opponents to find more workable and
less ambiguous language to the extent that it is possible to do
so and yet remain consistent with federal law.
Author's Proposed Technical and Clarifying Amendments :
On page 7 line 32 after "home" insert: ,either
permanently or for more than one year,
On page 8 line 5 after "residents" insert: of the home
On page 8 line 15 after "counselor" insert: ,if the
counseling is done in person,
PENDING RELATED LEGISALTION: SB 660 (Wolk) would provide that
a lender or other person who recommends the purchase of a
reverse mortgage owes to the prospective borrower a duty of
honesty, good faith, and fair dealing. That bill would also
require the lender to have reasonable grounds for believing that
the reverse mortgage was suitable, based on enumerated factors.
That bill would also permit any person injured as a result of a
breach of the lender's duty to bring a civil action for damages.
It is currently pending in the Senate Banking, Finance, and
Insurance Committee.
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
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California Chamber of Commerce
California Financial Services Association
California Independent Bankers
California Mortgage Bankers Association
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334