BILL ANALYSIS
AB 329
Page 1
Date of Hearing: May 4, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
AB 329 (Feuer) - As Amended: April 29, 2009
SUBJECT : Reverse mortgages.
SUMMARY : Makes changes to California's reverse mortgage law.
Specifically, this bill :
1)Provides that a lender or any other person that participates
in the origination of the mortgage shall not do the following:
a) 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.
b) Refer prospective borrowers to anyone for purchase of
financial or insurance products.
2)Requires that prior to accepting a final and complete
application for a reverse mortgage, the lender must provide
the borrower with a list of at least 10 counseling agencies
that are approved by the United States Department of Housing
and Urban Development (HUD).
3)Provides that the counseling agency used by the borrower shall
not receive any compensation, either directly or indirectly,
from the lender or from any other person or entity involved in
originating or serving the mortgage or sale of annuities,
investments, long-term care insurance, or any other financial
or insurance product.
4)Prohibits a lender from accepting a reverse mortgage loan
application unless the loan applicant has received, from the
lender, and prior to receiving counseling a disclosure in
16-point font that warns consumers on the consequences and
dangers of receiving a reverse mortgage and details their
rights and responsibilities.
5)Provides that in addition to the disclosure listed in #4, the
lender, prior to accepting a loan application, must provide a
written checklist of items that the borrower should discuss
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with the counselor. Additionally, the check-list must be
signed by the counselor and returned to the lender along with
the certification of counseling.
6)Allows a borrower to rescind a reverse mortgage transaction
within 30 days of execution.
EXISTING FEDERAL LAW :
1)Establishes, within 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 the 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.)
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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 :
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).)
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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
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.)
8)Establishes under the Elder Abuse and Dependent Adult Civil
Protection Act that a person may be held liable for "financial
abuse" of an elder or dependent adult for taking, secreting,
appropriating, or retaining the property of an elder or
dependent adult for wrongful use or with an intent to defraud.
(Welfare and Institutions Code, Section 15610.30).
9)Provides that a court may also impose treble damages against a
defendant who engages in an unfair or deceptive act or
practice that, among other things, cause the loss or
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encumbrance of a senior citizen's primary residence or causes
substantial physical, emotional, or economic damage to a
senior citizen who was substantially more vulnerable to the
defendant's conduct because of age, poor health or infirmity,
impaired understanding, restricted mobility, or disability.
(Civil Code, Section 3345.)
FISCAL EFFECT : None
COMMENTS :
Need for the bill .
According to the author ,the purpose of this bill is twofold:
(1) to ensure that seniors citizens who consider a reverse
mortgage are fully informed about the consequences of the
reverse mortgage and are aware of all alternatives; and (2) to
make sure that those who sell reverse mortgages consider whether
or not a reverse mortgage is suitable in light of the particular
financial circumstances of the senior citizen.
The last decade has seen an explosion in the reverse mortgage
market. Reverse mortgages allow senior citizens to convert home
equity into tax-free monthly income or a lump sum cash payout 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 senior (or his or her estate) does not repay the
loan until the last borrower dies, sells the home, or moves out.
The reverse mortgage is a sensible financial tool for many
seniors: it allows them to stay in their homes, provides them
with a supplemental income or needed cash, and eliminates
monthly mortgage payments. When the loan comes due, the house
is typically sold to pay off the debt with any surplus going to
the heirs or the estate.
More than 90% of all reverse mortgages are insured by the
Federal Housing Administration (FHA) under the HECM program,
which is sponsored by HUD. Federal law requires that borrowers
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receive "independent counseling" from a HUD-approved counseling
agency and prohibits a lender from making the purchase of an
annuity a condition of obtaining the loan. Existing federal law
also gives the borrower the right to rescind the mortgage
agreement within 3 days after closing.
California law affords some protections, as most recently
amended by SB 1609 (Ch. 202, Stats of 2006). Current law
prohibits a lender from referring a borrower to a person or
entity that sells annuities and prohibits a lender or broker
from offering an annuity until after closing and the three-day
right of rescission. California law also requires that the
lender provide the borrower with a list of at least 5 counseling
agencies.
Additionally, a number of lawsuits have been initiated in
California in recent years, involving unscrupulous salespersons
and originators that 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 the kinds of problems that can arise.
(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.)
A major concern that provided impetus for current California
law, recent federal changes and AB 329, is the issue of annuity
contracts that can be sold in conjunction with reverse
mortgages. Current California law prohibits a reverse mortgage
from being contingent upon the purchase of an annuity. The
concern that drives the changes proposed in AB 329 involve the
apparent, perceived or outright steering of reverse mortgage
borrowers into other financial contracts, such as annuities,
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upon completion of the mortgage transaction. In many cases a
reverse mortgage may lead to a lump sum payment to a borrower in
which they may seek out various investment options that may or
may not be appropriate for persons of advanced age.
Since annuity purchases surrounding reverse mortgage
transactions are of significant concern it is appropriate to
provide a brief description of these products below, with sample
of current California law relating to these products.
What are annuities?
There are generally two types of annuities-fixed and variable.
In a fixed annuity, the insurance company guarantees that you
will earn a minimum rate of interest during the time that your
account is growing. The insurance company also guarantees that
the periodic payments will be a guaranteed amount per dollar in
your account. These periodic payments may last for a definite
period, such as 20 years, or an indefinite period, such as your
lifetime or the lifetime of you and your spouse.
In a variable annuity, by contrast, you can choose to invest
your purchase payments from among a range of different
investment options, typically mutual funds. The rate of return
on your purchase payments, and the amount of the periodic
payments you will eventually receive, will vary depending on the
performance of the investment options you have selected.
State law also contains protections regarding the sale of
annuities. Advertisements for annuities that are directed
toward persons 65 years of age or older must prominently
disclose the fact that they are advertisements, and a person
soliciting the sale of annuities to persons 65 years or age or
older may not use names that are deceptive or misleading with
respect to the status, character, or proprietary or
representative capacity of the person or entity soliciting the
sale. (Insurance Code, Section 787.) A salesperson who meets
with a senior in the senior's home to sell an annuity must also
disclose in writing that he or she is giving a sales
presentation and that the senior has the right to end the
meeting at any time. (Insurance Code, Section 789.10.)
Additionally, state law prohibits the sale of annuities to a
senior when the purpose is to affect Medi-Cal eligibility and
the senior would otherwise qualify for Medi-Cal, or where the
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purpose is to affect Medi-Cal eligibility and the person would
not qualify for Medi-Cal after the purchase of the annuity.
(Insurance Code, Section 789.9.).
What does this bill do?
This bill takes several aspects of recent changes to federal law
regarding HECM mortgages and incorporates them into state law to
apply to HECM, as well as, private label reverse mortgages.
Cross selling
AB 329 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.
Counseling
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 10 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
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much-welcomed federal protections will apply to both HECM and
non-HECM loans.
Suitability Checklist
AB 329 requires a lender to provide a checklist to borrowers,
prior to attending counseling, that lists various topics and
issues that the potential borrower should discuss with the
counselor. The issues include:
1)How unexpected medical or other events that cause the
prospective borrower to move out of the home earlier than
anticipated will impact the total annual loan cost of the
mortgage.
2)The extent to which the prospective borrower's financial needs
would be better met by options other than a reverse mortgage.
3)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.
4)The effect of repayment of the loan on non-borrowing residents
after all borrowers have died or permanently left the home.
5)The prospective borrower's ability to finance routine or
catastrophic home repairs.
6)The impact that the reverse mortgage may have on the
prospective borrower's tax obligations.
Right of Rescission
AB 329 allows for a 30-day right of rescission on the part of
the borrower. A similar provision is not included under federal
law. The intention with this provision is to mirror the
rescission period for annuity contracts.
Questions
While much of AB 329 contains provision in federal law that
apply to government back reverse mortgages, it also expands
these provisions for private label reverse mortgages.
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Additionally, several provisions expand beyond the
considerations of federal law. The following is a discussion
and series of questions relating to some of these issues.
1)AB 329 provides for a 30-day right of rescission for a reverse
mortgage transaction. The justification for this length of
time is that annuity contracts, often marketed to those who
have received reverse mortgages, are subject to a 30-day
rescission right. On the other hand, this bill sets up clear
prohibitions on selling or recommending various investment
products related to the mortgage transaction, so is a 30 day
right of rescission necessary if the goal is to ensure that a
consumer who gets an annuity after getting the reverse
mortgage can rescind both contracts. With the firewalls
established in AB 329 such a rescission right may not be
necessary or practical. For example, by the time the borrower
has closed on the loan, they have been through a detailed
counseling session and have waited for full funding of the
loan from 30 to 90 days during the underwriting process.
First, the linkage between the rescission periods for these
two products is spurious at best. Many consumers will acquire
a reverse mortgage without ever considering an annuity as an
option. Second, these products operate in different ways that
would make the unwinding of one transactions easier than the
other. For example, if a consumer cancels an annuity, in the
worst case scenario they would be liable to the issuer of the
annuity for any first months payments that were made, while
the issues may be liable for the return of any premium
payments or fees associated with the opening of the annuity.
However, in the process of a reverse mortgage transaction
various liens against the property would be extinguished
through the process. If a borrower were allowed to rescind
the transaction how would the lender recoup money from liens
that may have been paid off? Additionally, what if the
borrower has spent a substantive amount of the funds from the
transaction? The committee may wish to consider amendments
that would strike the rescission provision from the bill.
2)This bill prohibits a lender from referring a prospective
borrower to anyone from the purchase of an annuity or
financial product. While the intent is to prevent the
steering of reverse mortgage borrowers into unsuitable
products, the prohibition may have unintended consequences by
preventing a financial institution from offering products and
services that may provide some benefit to the borrower. The
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idea of referral does not provide clarity in those cases where
a prospective borrower may ask about a product and then
receive the referral. Would the institutions then have to
deny the existence of other products due to this ban? While
the language in AB 329 prohibits referral for other products
or services, the federal statute (12 USC 1715z-20 (n)-(o).)
actually prohibits approval of a reverse mortgage being
contingent on the purchase of other products or services.
Even with this prohibition, the federal statute provides for
an exemption for title insurance, hazard, or other peril
insurance or other such products that are customary and normal
under a reverse mortgage transaction. It may be necessary to
clarify that the prohibition on cross selling does not apply
to those products that may be necessary to complete the
reverse mortgage such as hazard insurance products. The
language used in the cross selling provision is "prospective
borrower" implying that the prohibition only applies on the
front end of the transaction. If this is the intent, it may
be appropriate to provide clarifying changes to AB 329 that
clearly provide guidance on when a ban on other products is in
effect.
3)A lender is prohibited from participating in or employing any
party that participates in or is associated with any other
financial or insurance activity, unless the lender maintains
procedural safeguards. As with the previous issue, clarifying
amendments may be necessary.
4)Finally, the bill prohibits a counseling agency from receiving
any compensation, either directly or indirectly from the
lender, or other entity involved in originating the mortgage.
The intention appears to prevent certain abuses that have been
noted in media stories and in various reports that
demonstrated payments going directly from reverse mortgage
lenders to counselors creating perceived or actually conflicts
of interest where the counseling efforts may not have been
genuine. The way in which this language is crafted may
inadvertently exclude counseling agencies that have received
some type of grant or financial assistance from a financial
institutions through activities such as those that are
authorized and encouraged under the Community Reinvestment Act
(CRA). Additionally, several financial institutions have paid
counseling agencies, on a per file basis, to engage in
mortgage loan modifications. The committee may wish to
provide clarification to ensure that the CRA or charitable
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activity conducted by financial institutions in which
counseling organizations may receive some indirect benefit is
not prevented, or creates mass exclusions of counseling
organizations.
Proposed amendments.
1)Strike 30-day right of rescission:
Page 6, strike lines 8-11
Page 7, strike lines 6-11
2)Provide clarity on the time-frame regarding the prohibition on
cross selling of products. Page 5, strike 19-20 and insert,
"(2)Refer the borrower to anyone for the purchase of an
annuity or other financial or insurance product prior to
closing of the reverse mortgage or before the expiration of
the right of the borrower to rescind the reverse mortgage
agreement."
3)Clarify that prohibitions on cross selling do not prohibit the
offering of products that may be necessary under a
transaction. Page 5, insert new section after line 20, "(3)
Nothing in this section shall prevent a lender from offering
or referring borrowers for title insurance, hazard, flood, or
other peril insurance, or other such products that are
customary and normal under a reverse mortgage transaction. "
4)In order to prevent unethical payments to counselors, but also
ensure that normal chartable activity is not inhibited the
following amendment is necessary. On page 5, line 31 after
"product." Insert, "Nothing shall prevent a counseling agency
from receiving financial assistance that is unrelated to the
offering or selling of reverse mortgages, and that is
provided by a lender as part of chartable or philanthropic
activities."
5)While not recommended as an amendment at this time, the author
may wish to consider further clarification on the type and
nature of specific financial and insurance products that
should be prohibited under the cross selling provisions. For
example, the offering of deposit accounts has not appeared to
be a problem associated with reverse mortgage transactions.
The author may wish to consider naming the specific products
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that are found to be most problematic and prohibit those from
being offered, or instead, providing a list of exemptions for
products.
Related Legislation .
SB 660 (Wolk), current session, imposes on any person or
recommends a reverse mortgage a "duty of honesty, good faith,
and fair dealing." The bill also sets out "suitability
standards" to determine if there has been a breach of fiduciary
duty and provides a cause of action for breach.
SB 1609 (Simitan ), Chapter 202, Stats. of 2006) amended
counseling provisions of existing law to require the lender to
provide a list of at least five lenders; prohibited a lender
from making the purchase of an annuity a pre-condition of
obtaining a reverse mortgage; and required that reverse mortgage
contract comply with existing state law requiring contracts to
translated into a covered language if the contract was
primarily negotiated in that language.
AB 456 (Ducheny), Chapter 797, Stats. of 1997) established the
statutory scheme regulating reverse mortgages.
REGISTERED SUPPORT / OPPOSITION :
Support
AARP
Opposition
California Bankers Association
California Chamber of Commerce
California Financial Services Association
California Independent Bankers
California Mortgage Bankers Association
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081