BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 660 (Wolk) Hearing Date: May 6, 2009
As Amended April 27, 2009
Fiscal: No
Urgency: No
SUMMARY Would impose a duty of honesty, good faith, and fair
dealing on any lender, broker, person, or entity who recommends
the purchase of a reverse mortgage to a borrower in anticipation
of financial gain, and would require the lender, broker, person,
or entity to have reasonable belief that the borrower
understands the risks, benefits, and reasonable alternatives
involved in the purchase of a reverse mortgage.
DIGEST
Existing federal law and regulations
1. Define a reverse mortgage as a nonrecourse consumer credit
obligation in which a mortgage, deed of trust, or equivalent
consensual security interest securing one or more advances is
created in the consumer's principal dwelling, and any principal,
interest, or shared appreciation or equity is due and payable
(other than in the case of default) only after the consumer
dies, the dwelling is transferred, or the consumer ceases to
occupy the swelling as a principal dwelling (Truth in Lending
Act, 12 CFR 226.33);
2. Require a creditor who issues a reverse mortgage to provide
specified disclosures to the borrower, informing the borrower
that he or she is not obligated to complete the reverse mortgage
transaction merely because he or she has received the
disclosures required by federal law or has signed an application
for a reverse mortgage loan; providing the borrower with a
good-faith projection of the total cost of the credit to him or
her, as specified; and itemizing pertinent information about the
loan, including the loan terms, charges, the age of the youngest
borrower, and the appraised property value (12 CFR 226.33);
3. Provides consumers with a three-day right to rescind a
SB 660 (Wolk), Page 2
consumer credit transaction, in which a security interest is or
will be retained or acquired in a consumer's principal dwelling,
as specified (12 CFR 226.23);
4. 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 HECM loans
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
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);
5. 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 HUD-approved counseling
agencies (12 USC Section 1715z-20; 24 CFR 206.41);
6. Requires all HECM loan counselors to be approved by HUD and
meet HUD standards, as specified. Further requires the
Secretary of HUD to develop uniform counseling protocols by July
30, 2009. The protocols must require a qualified counselor to
discuss, generally, financial options other than a reverse
mortgage, the financial implications of reverse mortgages,
including any tax consequences, and the affect of the loan on
eligibility for government assistance programs (12 USC 1715z-20;
24 CFR Section 214.103);
7. 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
SB 660 (Wolk), Page 3
HECM loan 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).
Existing law
1. Defines a reverse mortgage as a nonrecourse loan secured by
real property, which meets all of the following criteria (Civil
Code Section 1923):
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 California or federal law;
2. Specifies several conditions that must be satisfied by lenders
who make reverse mortgage loans, and several prohibitions that
apply to those lenders, and includes among those rules, the
following (Civil Code Section 1923.2):
a. Before a lender may accept a final and complete
application for a reverse mortgage loan or assess any fees,
that lender must:
i. Refer the prospective borrower to a
HUD-approved housing counseling agency;
ii. Provide the borrower with a list of at least
five HUD-approved housing counseling agencies, including
at least two agencies that can provide counseling by
telephone; and
iii. Receive a certification from the applicant or
the applicant's authorized representative that the
applicant has received counseling from a HUD-approved
counseling agency. The counseling is required to meet
the standards and requirements established by HUD for
reverse mortgage counseling. The certification must be
signed by the borrower and the agency counselor, and
SB 660 (Wolk), Page 4
must include the date of counseling, and the name,
address, and telephone numbers of both the counselor and
the borrower;
b. No lender may make a reverse mortgage loan without first
complying with, or in the case of brokered loans, ensuring
compliance with, the requirements of Civil Code Section 1632,
relating to the translation of loan documents;
3. Prohibits a reverse mortgage lender from requiring an applicant
for a reverse mortgage to purchase an annuity as a condition of
obtaining a reverse mortgage loan, and provides that a reverse
mortgage lender or broker arranging a reverse mortgage loan may
not offer an annuity to the borrower or refer the borrower to
anyone for the purchase of an annuity, before closing the
reverse mortgage, or before the borrower's right to rescind the
mortgage contract has expired (Civil Code Section 1923.2);
4. Provides that reverse mortgage loan payments made to a borrower
must 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, as specified (Civil
Code Section 1923.9);
5. Imposes a special duty of honesty, good faith, and fair dealing
on an insurer, broker, agent, and all others engaged in the
transaction of insurance with a prospective insured who is 65
years of age or older, as specified (Insurance Code Section
785), and establishes several requirements that must be followed
and prohibitions that must be observed when seniors age 65 or
older are marketed or sold insurance policies (Insurance Code
Sections 785 et seq.);
6. Authorizes the Insurance Commissioner to assess an
administrative penalty for the violation of the duty immediately
above and other provisions relating to the sale of insurance to
seniors; authorizes actions for injunctive relief, penalties,
damages, and restitution for violating the sections of law
relating to the sale of insurance products to seniors to be
brought in superior court by the Attorney General, a district
attorney, or city attorney; and authorizes the court to award
reasonable attorney's fees and court costs to the prevailing
plaintiff (Insurance Code Sections 789 and 789.3);
7. Allows seniors to rescind an individual life insurance policy
or individual annuity contract, and receive a refund of all
SB 660 (Wolk), Page 5
premiums and fees paid, for 30 days following the purchase of
such policy or contract, and requires certain disclosures in
that regard (Insurance Code Section 10127.10);
8. Imposes a duty of honesty, good faith, and fair dealing on all
insurers, brokers, agents, and others engaged in the business of
insurance, with respect to policyholders or prospective
policyholders of long-term care insurance (Insurance Code
Section 10234.8), requires every insurer or other entity
marketing long-term care insurance to develop and use
suitability standards to determine whether the purchase or
replacement of long-term care insurance is appropriate for the
needs of the applicant, train its agents in the use of those
suitability standards, and develop procedures that take the
following into account (Insurance Code Section 10234.95):
a. The ability to pay for the proposed coverage and other
pertinent financial information related to the purchase of
the coverage;
b. The applicants goals or needs with respect to long-term
care, and the advantages and disadvantages of insurance to
meet those goals or needs;
c. The value, benefits, and costs of the applicant's
existing insurance, if any, when compared to the values,
benefits, and costs of the recommended purchase or
replacement;
9. Requires financial institutions, as defined, and their officers
and employees, from January 1, 2007 until January 1, 2013, to
report suspected financial abuse of an elder or dependent adult,
as defined, and makes failure to report suspected financial
abuse a violation of the law, subject to a civil penalty up to
$1,000 ($5,000 if failure to report is willful), paid by the
financial institution to the party bringing the action (Welfare
and Institutions Code Section 15630.1).
Existing common law
1. Imposes a fiduciary duty on investment advisors with respect
to the advice they provide to their clients, pursuant to a 1963
case decided by the United States Supreme Court (SEC v. Capital
Gains Research Bureau, Inc, 375 U.S. 180, 84 S. Ct. 275). The
Supreme Court held that Section 206 of the Advisers Act, which
generally makes it unlawful for an investment adviser to engage
SB 660 (Wolk), Page 6
in fraudulent, deceptive, or manipulative conduct, imposes a
fiduciary duty on investment advisers, by operation of law;
2. Imposes a fiduciary duty on mortgage brokers, pursuant to a
1979 case decided by the California Supreme Court (Wyatt v.
Union Mortgage Company, 24 Cal. 3d 773, 23748). In that case,
the court concluded that specified provisions of the Business
and Professions Code and the Civil Code, working together,
"impose upon mortgage loan brokers an obligation to make a full
and accurate disclosure of the terms of a loan to borrowers and
to act always in the utmost good faith toward their principals."
SB 660 (Wolk), Page 7
This bill
1. Would provide that any lender, broker, person, or entity
who recommends the purchase of a reverse mortgage, in
anticipation of financial gain, owes the prospective
borrower a duty of honesty, good faith, and fair dealing,
and would provide that these duties are in addition to any
other duties, express or implied, that may exist;
2. Would further require the lender, broker, person, or entity
referenced above to have reasonable belief that the borrower
understands the risks, benefits, and reasonable alternatives
involved in the purchase of a reverse mortgage.
COMMENTS
1. Purpose of the bill To protect seniors from obtaining
reverse mortgages that are unsuitable for them, and, in
doing so, help seniors avoid the devastating effects of an
unsuitable reverse mortgage loan.
2. Background A reverse mortgage is a home loan that allows a
senior homeowner, 62 years of age or older, to convert a
portion of the equity in his or her home into cash payments.
The senior is not required to pay back the loan during
their lifetime, unless they no longer use the home as their
principal residence. The loan is due when the senior sells
his or her home, no longer uses it as his or her primary
residence, or dies. Because the vast majority of reverse
mortgages sold to seniors at the present time are Home
Equity Conversion Mortgages (HECMs), insured by the Federal
Housing Administration (FHA), the discussion below will
focus on the rules that apply to HECMs.
There are, however, rules which apply to all reverse mortgages,
not just HECMs, something which adds a level of complexity
to the discussion about this bill. As noted above under the
"existing law" discussion, Truth in Lending Act rules, which
generally require consumer disclosures, apply to all reverse
mortgages, regardless of whether they are made by
federally-regulated or state-regulated lenders, and
regardless of whether the mortgage is FHA-insured.
California's law applies to all reverse mortgages, whether
or not the mortgage is FHA-insured; however, federal
pre-emption issues cloud the question of whether
California's reverse mortgage law applies to reverse
SB 660 (Wolk), Page 8
mortgages made by federally-regulated lenders.
Representatives of federally-regulated lenders have informed
Committee staff that their clients are following
California's reverse mortgage laws at the present time.
They are not willing to speculate about whether
federally-regulated lenders would continue to follow
California's reverse mortgage laws, if they were changed in
a way that imposed significant legal liability on the
lenders. Thus, this bill would clearly apply to reverse
mortgages originated by state-regulated lenders, regardless
of whether those mortgages were FHA-insured. It is unclear
whether federally-regulated reverse mortgage lenders would
comply with the provisions of this bill.
As noted immediately above, the vast majority of reverse
mortgages originated at the present time are so-called HECM
mortgages. Under HECM rules, the amount a borrower may
borrower depends on his or her age, the interest rate of the
loan, the appraised value of the borrower's home, and the
FHA mortgage limits in the borrower's area (which recently
increased, pursuant to enactment of the American Recovery
and Reinvestment Act of 2009 [Public Law 111-5]). Generally
speaking, the more valuable one's home is, the more the
equity the borrower holds in that home, the older one is,
and the lower the interest rate on the loan, the more a
senior can borrow through a reverse mortgage. According to
FHA, "based on a loan with interest rates of approximately
9%, and a home qualifying for $100,000, a 65-year-old could
borrower up to 34% of the home's value; a 75-year-old could
borrow up to 47% of the home's value; and, an 85-year-old
could borrow up to 64% of the home's value. These
percentages do not include closing costs because these
charges vary."
To be eligible for a HECM, FHA requires that the borrower be a
homeowner, 62 years of age or older, own the home or have a
mortgage balance low enough that it can be paid off at
closing with proceeds from the reverse mortgage loan, live
in the home, and receive consumer information from a
HUD-approved counseling agency before obtaining the loan.
There are no asset or income limitations on eligibility.
FHA refers interested borrowers to the Housing Counseling
Clearinghouse, at 1-800-569-4287, to obtain the name and
telephone number of an approved counseling agency and a list
of FHA-approved lenders in the borrower's area.
SB 660 (Wolk), Page 9
A variety of homes are eligible for HECMs, including
single-family dwellings, 2- to 4-unit dwellings in which the
borrower owns and occupies one of the units, townhouses,
detached homes, units in FHA-approved condominiums, and
manufactured homes built on or after June 1976, which have
permanent foundations. FHA has another program, called the
Spot Loan program, which can help a senior whose condominium
does not qualify for a HECM.
With HECMs, borrowers have five options regarding the way(s) in
which they may receive their reverse mortgage payments,
including: 1) tenure - equal monthly payments, paid for as
long as one borrower lives and continues to occupy the
property as his or her principal residence; 2) term - equal
monthly payments for a fixed number of months selected; 3)
line of credit -- unscheduled payments, made in installments
or at times and amounts of the borrower's choosing, until
the line of credit is exhausted; 4) modified tenure - a
combination of line of credit and monthly payments for as
long as the borrower remains in the home; and 5) modified
term - a combination of line of credit and monthly payments
for a fixed period of months of the senior's choosing.
HECM borrowers may choose either a fixed interest rate or an
adjustable interest rate at origination. If they choose an
adjustable interest rate, they may choose to have that
interest rate adjust monthly or annually. There is no
interest rate cap on a monthly adjustable rate. Annually
adjustable rates are capped at increasing by no more than 2
percentage points per year, and by no more than 5 percentage
points over the life of the loan. Because reverse mortgage
borrowers receive money, rather than paying it, the interest
rate on these types of loans works in reverse, compared to
the way in which it works on "regular" types of mortgage
loans. In the case of a reverse mortgage, the higher the
interest rate, the less money the borrower receives.
HECM loans also include several fees, including an origination
fee, closing costs, mortgage insurance premiums, interest,
and servicing fees.
When a senior borrower sells his home or no longer uses it as
his or her primary residence, the senior or his or her
estate must repay the cash received from the reverse
mortgage, plus interest and other fees, to the lender. The
SB 660 (Wolk), Page 10
remaining equity in the home, if any, belongs to the
borrower or his or her heirs. The loan also becomes due and
payable in any of the following additional circumstances:
1) the borrower does not pay property taxes or hazard
insurance; 2) the borrower fails to live in the home for 12
consecutive months (as could occur if the borrower had a
nursing home stay of 12 months or longer); or 3) the
borrower allows the property to deteriorate, and does not
make necessary repairs.
3. Discussion Reverse mortgages are becoming increasingly
popular in the United States. According to a recent article
in the Wall Street Journal ("Reverse Mortgage: Get Cash,
But Use Caution," by Anne Tergesen), the number of
federally-insured reverse mortgages grew from 43,082 in 2005
to 112,015 in 2008. One of the reasons for their popularity
is tied to the declining stock market. Some seniors are
looking for cash and do not wish to draw down already
depleted investment accounts. According to a reverse
mortgage broker quoted in that WSJ article, "We're seeing
more people use reverse mortgages to give their portfolios
time to more fully recover."
While reverse mortgages can provide seniors with cash they might
not otherwise have, have access to, or wish to access, they,
like all investments, carry risks. Borrowers who draw down
their home equity and lack other sources of income can find
themselves without the resources they need in their later
years, especially if they can no longer live on their own,
and require in-home or facility-based care.
Those who support this bill want to ensure that no senior is
sold a reverse mortgage that is unsuitable for them. They
point to inappropriate use by seniors of reverse mortgage
proceeds, which leave the seniors destitute when they are in
greatest need of financial resources to support their
increased care needs. Those in opposition are concerned
about the duties this bill would place on lenders, and the
liability those duties would carry. They claim that the
bill could have a chilling effect on the reverse mortgage
industry.
As noted above in the lengthy description of existing law,
California law, federal law, and case law recognize a
heightened duty on those who sell several types of financial
and insurance products to seniors, on those who act as
SB 660 (Wolk), Page 11
investment advisers, and on those who broker mortgages.
Existing law also contains provisions intended to protect
seniors who are considering the purchase of reverse
mortgages, and provisions intended to identify and stop
elder and dependent financial abuse. Despite the existence
of these multiple laws, all of which carry important
protections for seniors, this bill's sponsor and its
supporters assert that a significant number of seniors are
taking out reverse mortgages, and using the proceeds of
those mortgages inappropriately.
The co-existence of multiple protections in existing law to
protect seniors, and evidence that seniors are
inappropriately using reverse mortgage proceeds, prompt two
of the key questions for this Committee, when it considers
SB 660. Specifically:
a. If all of the state and federal laws and case
law on the books are insufficient to protect seniors
from misusing the proceeds of reverse mortgages, will
adding another law, as this bill proposes to do, make
a positive difference?
b. What aspects of existing law are insufficient
to protect seniors considering the purchase of a
reverse mortgage, and how, if at all, should existing
law be modified to improve its effectiveness?
Other key questions include the following:
c. Those who broker reverse mortgages already
have a fiduciary duty toward borrowers. Is that
fiduciary duty being observed? If not, should it be
more clearly stated in existing law?
d. Alternately, is the problem one of
enforcement? Are enforcement resources adequate to
ensure that those who owe fiduciary and other duties
to seniors are following the law?
e. Seniors are required to receive counseling
before they are sold a reverse mortgage. Is that
counseling adequate?
HUD, the department responsible for certifying those who
perform the counseling, appears to think it is not. A
SB 660 (Wolk), Page 12
recent article in American Banker magazine ("Mortgage
Pipeline," dated April 2, 2009) stated, "HUD is also
concerned that the mandatory counseling for senior
citizens who are considering reverse mortgages is not
as impartial as it could be. A ? letter to lenders
posted on HUD's web site Friday reiterated that a
lender cannot contact a counselor or counseling agency
to refer prospective borrowers, discuss the timing or
scheduling of the counseling or request information
regarding the topics covered in counseling. 'HUD is
aware of instances in which a lender, or lenders, have
dialed a counseling agency's phone number and then
handed the phone to the borrower to schedule
counseling?The borrower must take the initiative.'"
In conversations with the sponsor prior to this bill
hearing, the sponsor indicated that SB 660 is not
about the quality of the counseling provided to
seniors. Should it be?
4. Concerns As drafted, the bill's requirement that a lender
have a reasonable relief that a senior understands the
risks, benefits, and reasonable alternatives of the reverse
mortgage is problematic, because the bill offers no
direction about how the author intends this language to be
interpreted.
The bill is unclear, for example, on whether a lender, broker,
person, or entity who recommends the purchase of a reverse
mortgage may rely upon the requirement that seniors receive
counseling before they are able to obtain a reverse mortgage
as the basis for their reasonable belief that the senior
understands the reverse mortgage.
If, as is likely, the bill's language is premised on a belief
that the existing counseling requirement is insufficient
basis for a lender, broker, person, or entity to have a
reasonable belief that the senior understands the risks,
benefits, and reasonable alternatives involved in his or her
purchase of a reverse mortgage, the author's language is
likely to result in significant litigation over what can
form the basis for a reasonable belief. Lenders, brokers,
and others may be considerably less likely to recommend the
purchase of a reverse mortgage, if they fear being sued over
the basis for their recommendations.
SB 660 (Wolk), Page 13
Amendments are suggested below (see Suggested Amendments
section) to address these concerns.
5. Support The sponsor of this bill, California Advocates for
Nursing Home Reform (CAHNR) believes that SB 660 will help
many seniors avoid the devastating effects of an unsuitable
reverse mortgage loan.
CAHNR states that reverse mortgages are aggressively marketed to
seniors and being touted, irresponsibly in CAHNR's view, as
a smart way to improve a senior's quality of life. Those
who market reverse mortgages do not stress that these are
very expensive loans that will, in a relatively short period
of time, strip the home of its net worth. "Seniors are told
that they never have to worry about leaving their home or
owing more than the value of their home?This is not
altogether true. Borrowers with reverse mortgages can and
do get foreclosed on. 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.
Seniors without the means to fix their leaky roofs will end
up in default."
CAHNR also believes that the state of California has an interest
in ensuring that only suitable reverse mortgages are sold to
seniors. Low-wealth seniors who obtain reverse mortgages
and subsequently need to move into assisted living
facilities may be left with little or no money with which to
afford private pay facilities. These seniors may ultimately
have no option but to move into a nursing home that accepts
Medi-Cal. The state will have no option but to pay for that
care.
CAHNR offers three worst-case scenarios that can befall seniors
who obtain reverse mortgages that are unsuitable for them:
1) Seniors who have exhausted their equity through reverse
mortgage loans will be deprived of the opportunity to move
into assisted living facilities; 2) Seniors who imprudently
waste their home equity through frivolous or nonessential
undertakings will, in the future, find themselves stranded
in their homes and unable to maintain necessary expenditures
after exhausting their equity; and 3) Seniors will face a
life of destitution if they fall prey to financial scammers
who connive to get them to pull out home equity in order to
fund financial adventures.
SB 660 (Wolk), Page 14
Aging Services of California (Aging Services) sees SB 660 as
providing needed protection for seniors. The organization
states that, without the protections in SB 660, thousands of
seniors will be sold reverse mortgages that radically affect
established estate plans, retirement destinations, and care
for dependent children. Aging Services members have
witnessed seniors working their way to the top of a waiting
list for assisted living, only to find their resources so
depleted by reverse mortgages that they can no longer fund
their retirement plans.
The California Alliance for Retired Americans (CARA) writes
that, while reverse mortgages may not be fraudulent per se,
they are extremely complex and expensive to use, and are
being marketed to seniors as the answer to all of their
financial problems, without any downside. CARA sees SB 660
as a bill that brings needed regulation to the reverse
mortgage market, and will protect seniors from possible
abuses.
The California Association of Mortgage Brokers believes the bill
is a reasonable effort to help further transparency, and
help ensure that counselors involved in the reverse mortgage
process discus all known issues that may impact a senior's
decision to take out a reverse mortgage.
6. Opposition The California Bankers Association, California
Chamber of Commerce, California Financial Services
Association, California Independent Bankers Association, and
California Mortgage Bankers Association (the coalition)
oppose SB 660, on grounds that the bill will expose lenders
to significant legal liability, and have a chilling effect
on the reverse mortgage industry.
To the coalition, the requirements of SB 660 appear to imply
that the protections in existing state and federal law are
insufficient. The coalition would prefer to address those
deficiencies in a targeted manner that will not adversely
impact the sale of reverse mortgage products. Furthermore,
the coalition states that, as drafted, "SB 660 would
effectively create a fiduciary duty for lenders who offer
reverse mortgages, as it would require lenders to somehow
make a subjective determination about the borrower's
understanding of reverse mortgages, as well as the
'reasonable alternatives' available to them. How is a
lender supposed to quantify the 'reasonable beliefs' of a
SB 660 (Wolk), Page 15
borrower? How would a lender verify that a borrower
understands what 'reasonable alternatives' are available to
them or that they fully understand all of the 'risks' and
'benefits' of a reverse mortgage? Who could bring suit for
a purported violation of this measure? Could a
'prospective' borrower file suit even if they don't
ultimately purchase a reverse mortgage? How long would a
party have to file suit? Finally, what are the damages for
a purported violation of this measure?"
The California Credit Union League (CCUL) sees SB 660 as a
well-intentioned measure, which, in seeking to impose
standards on the bad actors in the marketplace, will instead
negatively affect responsible lenders. CCUL cites concerns
with a number of terms in the bill. First, it is unclear
whether the bill applies to situations in which a credit
union member visits a credit union to request a reverse
mortgage. If a lender responds to a request from its
customer to provide that customer with a reverse mortgage,
is the lender recommending the purchase of a reverse
mortgage to the senior?
CCUL also echoes the concerns expressed above about the
"reasonable belief" terminology in the bill. Once a senior
receives counseling from a HUD-certified counselor (as
required by existing law), can the credit union use a
certificate that counseling is complete as the basis for a
reasonable belief that the borrower understands the risks,
benefits, and reasonable alternatives involved in the
purchase of the reverse mortgage? CCUL is concerned that,
as drafted, the bill will result in the courts answering
that question.
CCUL is also concerned about the new duty of honesty, good
faith, and fair dealing that SB 660 would impose. Credit
unions fearing liability from the new duty might refuse to
offer a reverse mortgage to a credit union member who wished
to obtain one. "Simply put, the liabilities that would be
imposed by SB 660 and the potential for legal action against
a credit union are severe enough that many of the credit
unions in California would eliminate this product for their
members."
7. Suggested Amendments If this Committee wishes to address
some of the concerns, expressed above, about the "reasonable
belief" language in the bill, and support an alternate
SB 660 (Wolk), Page 16
approach to protecting seniors who engage in reverse
mortgage transactions, the following amendments are
suggested:
Amend the existing language of the bill, as follows:
1923.1 is added to the Civil Code, to read: Any lender, broker,
person, or entity who recommends the purchase of a reverse
mortgage in anticipation of financial gain, owes the
prospective borrower a duty of honesty, good faith, and fair
dealing and shall have reasonable belief that the borrower
understands the risks, benefits, and reasonable alternatives
involved in the purchase of a reverse mortgage. These
duties are in addition to any other duties, express or
implied, that may exist.
In addition, add amendments to Section 1923.5 of the Civil Code
to the bill, as follows:
1923.5. (a) No reverse mortgage loan application shall be
taken by a lender unless the loan applicant has received
from the lender, prior to receiving counseling, the
following plain language statement in conspicuous 16-point
type or larger, advising the prospective borrower about
counseling prior to obtaining the reverse mortgage loan:
IMPORTANT NOTICE
TO REVERSE MORTGAGE LOAN APPLICANT
A REVERSE MORTGAGE IS A COMPLEX FINANCIAL TRANSACTION THAT
PROVIDES A MEANS OF USING THE EQUITY YOU HAVE BUILT UP IN
YOUR HOME, OR THE VALUE OF YOUR HOME, AS A SOURCE OF
ADDITIONAL INCOME. IF YOU DECIDE TO OBTAIN A REVERSE
MORTGAGE LOAN, YOU WILL SIGN BINDING LEGAL DOCUMENTS THAT
WILL HAVE IMPORTANT LEGAL AND FINANCIAL IMPLICATIONS FOR
YOU AND YOUR ESTATE. IT IS THEREFORE IMPORTANT TO
UNDERSTAND THE TERMS OF THE REVERSE MORTGAGE AND ITS
EFFECT. BEFORE ENTERING INTO THIS TRANSACTION, YOU ARE
REQUIRED TO CONSULT WITH AN INDEPENDENT LOAN COUNSELOR. A
LIST OF APPROVED COUNSELORS WILL BE PROVIDED TO YOU BY THE
LENDER. YOU MAY ALSO WANT TO DISCUSS YOUR DECISION WITH
FAMILY MEMBERS OR OTHERS ON WHOM YOU RELY FOR FINANCIAL
ADVICE.
(b) (1) In addition to the plain statement notice described
SB 660 (Wolk), Page 17
in subdivision (a), no reverse mortgage loan application
shall be taken by a lender unless the lender provides the
prospective borrower, prior to his or her meeting with a
counseling agency on reverse mortgages, with a written
checklist which conspicuously alerts the prospective
borrower, in 12-point type or larger, that he or she should
discuss with the agency counselor the following issues:
(A) How unexpected medical or other events that cause the
prospective borrower to move out of the home earlier than
anticipated will impact the total annual loan cost of the
mortgage.
(B) The extent to which the prospective borrower's financial
needs
would be better met by options other than a reverse
mortgage,
including, but not limited to, less costly home equity lines
of
credit, property tax deferral programs, or governmental aid
programs.
(C) Whether the prospective borrower intends to use the
proceeds
of the reverse mortgage to purchase an annuity or other
insurance
products and the consequences of doing so.
(D) The effect of repayment of the loan on nonborrowing
residents
after all borrowers have died or permanently left the home.
(E) The prospective borrower's ability to finance routine or
catastrophic home repairs, especially if maintenance is a
factor that
may determine when the mortgage becomes payable.
(F) The impact that the reverse mortgage may have on the
prospective borrower's tax obligations, eligibility for
government
assistance programs, and the effect that losing equity in
the home
will have on the borrower's estate and heirs.
(2) The checklist required in paragraph (1) shall be signed
by the
SB 660 (Wolk), Page 18
agency counselor and by the prospective borrower and
returned to the
lender along with the certification of counseling required
under
subdivision (l) of Section 1923.2, and the loan application
shall not
be approved until the signed checklist is provided to the
lender. A
copy of the checklist shall be made provided to the
borrower.
8. Comparing This Bill to New HUD Counseling Protocols As
noted in the Existing federal law section of this bill, HUD
is required to develop uniform counseling protocols for HECM
loans by July 30, 2009. Once those protocols are available,
Committee staff recommends that the author review them, and
ensure that the checklist in her bill is consistent with,
and not in conflict with, the new HUD protocols.
9. Prior and Related Legislation
a. AB 329 (Feuer), as amended April 16, 2009:
Requires lenders to provide the written checklist
described immediately above in the Suggested
Amendments section to prospective borrowers, before
the borrowers seek reverse mortgage counseling;
prohibits a lender or any other person who originates
a reverse mortgage from participating in, being
associated with, or employing any party that
participates in or is associated with any other
financial or insurance activity; prohibits these
entities from referring a prospective borrower to
anyone for the purchase of other financial or
insurance products; requires the lender to provide the
prospective borrower with a list of at least 10
HUD-certified housing counseling agencies; and
provides borrowers with a 30-day right to rescind a
reverse mortgage contract into which they enter.
Pending in the Assembly Banking & Finance Committee.
b. SB 1609 (Simitian), Chapter 202, Statutes of
2006: Added the language prohibiting lenders from
making a reverse mortgage until it receives a signed
certification that the borrower received independent
counseling about the transaction, prohibited lenders
from requiring a borrower to purchase an annuity as
SB 660 (Wolk), Page 19
part of the reverse mortgage transaction, and added
the reverse mortgage translation requirement
summarized above.
c. SB 192 (Scott), 2005-06 Legislative Session:
Would have required a life agent, or an insurer, where
no agent was involved, to have reasonable grounds for
believing that the sale of an annuity to a senior was
suitable, on the basis of facts disclosed by the
senior, as specified. Passed the Senate, never taken
up by the author in the Assembly Insurance Committee.
d. AB 2316 (Chan), Chapter 835, Statutes of 2004:
Created a Life and Annuity Consumer Protection
Program, dedicated to protecting consumers of life
insurance and annuity products in California.
e. SB 620 (Scott), Chapter 547, Statutes of 2003:
Prohibited the sale of annuities to seniors in
certain circumstances; required training for life
agents as a condition of selling annuities, as
specified; enacted additional restrictions on
advertising practices that target senior citizens;
imposed restrictions on the sale of life insurance
policies and annuities in a senior citizen's home; and
enacted other changes intended to protect senior
consumers who are being marketed life insurance
policies or annuities.
POSITIONS
Support
California Advocates for Nursing Home Reform (sponsor)
Aging Services of California
California Alliance for Retired Americans
California Association of Mortgage Brokers
Oppose
California Bankers Association
California Chamber of Commerce
California Financial Services Association
California Independent Bankers Association
California Mortgage Bankers Association
California Credit Union League
SB 660 (Wolk), Page 20
Consultant: Eileen Newhall (916) 651-4102