BILL ANALYSIS
AB 329
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 329 (Feuer)
As Amended July 23, 2009
Majority vote
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|ASSEMBLY: |68-2 |(May 14, 2009) |SENATE: |28-7 |(September 1, |
| | | | | |2009) |
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Original Committee Reference: JUD.
SUMMARY : Amends California reverse mortgage law to strengthen
existing counseling and cross-selling provisions and requires
lenders to provide the borrower with a checklist prior to
counseling that highlights the risks and alternative to reverse
mortgages. Specifically, this bill :
1)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; or,
b) Refer the prospective borrower to anyone for the
purchase of an annuity or other financial or insurance
product.
2)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 10 counseling
agencies that are approved by the United States Department of
Housing and Urban Development (HUD) 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
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other type of financial or insurance product, except as
specified.
3)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.
The Senate amendments :
1)Make clarifying references to corresponding federal law
provisions and conforming changes to SB 660, which also amends
the existing reverse mortgage statute.
2)Specify that if a borrower consults a counseling agency prior
to contacting the lender, then the counseling agency shall
provide the prescribed checklist.
AS PASSED BY THE ASSEMBLY , this bill was substantially similar
to the version approved by the Senate.
FISCAL EFFECT : None
COMMENTS : The last decade has seen an explosion in the reverse
mortgage market. Reverse mortgages allow persons 62 years of
age or 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
HUD, but there are also a smaller number of so-called
"proprietary" reverse mortgages are not federally insured and
are not subject to the same restrictions and requirements as the
HECM loans. The provisions of this bill would apply to both
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types.
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
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. These loans can also be
risky when the proceeds of the reverse mortgages are used to
invest in annuities or other long insurance or investment
product.
According to the author, existing state and federal law provides
some consumer protection. For example, existing law requires
independent third party counseling prior to loan closing, and
recent changes in federal law impose greater restrictions on
cross-selling mortgages with annuities. Existing law also gives
seniors a three-day right of rescission. These protections,
however, leave much to be desired. As the American Association
of Retired Persons and other senior groups have noted, the
federal counseling requirements only apply to FHA-backed loans
and counseling is often inadequate or rife with conflicts of
interests.
AB 329, according to the author, seeks to build upon these
existing protections and ensure that as the reverse mortgage
market grows, California seniors will have adequate information.
Specifically, AB 329 makes the following changes to existing
law:
Counseling: By incorporating recent federal changes, require
all lenders and loan originators to provide borrowers with a
list of HUD-approved counseling agencies; prohibits the
counseling agency from receiving compensation from lenders, loan
originators, or any person or entity selling annuities or
related financial products.
"Cross Selling": By incorporating recent federal changes,
prohibit all lenders from participating in, employing, or having
any affiliation with the selling of annuities and other
financial products, unless the lender or originator maintains
procedural safeguards.
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Checklist: Requires lender to provide the borrower with a
checklist, prior to counseling that highlights the risks
associated with, and alternatives to, a reverse mortgage;
requires that checklist be signed by the borrower and counselor
and returned to the lender, as specified; specifies that, if the
borrower contacts a counseling agency before contacting the
lender, then the lender shall provide the borrower with the
checklist.
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334
FN: 0002045