BILL ANALYSIS
SB 660
Page 1
Date of Hearing: June 29, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
SB 660 (Wolk) - As Amended: June 23, 2009
SENATE VOTE : 23-15
SUBJECT : Reverse Mortgages.
SUMMARY : Provides that any lender, broker, person or entity
who recommends the purchase of a reverse mortgage in
anticipation of financial gain owes the borrower a duty of
honesty, good faith, and fair dealing. Specifically, this bill :
1)Specifies that the duty shall not be deemed to have been
breached based on actions or omissions of a counseling agency
used by the borrower to fulfill the mandatory counseling
requirement.
2)Prohibits the acceptance of a reverse mortgage application by
a lender unless the lender provides the prospective borrower
with a check list that alerts the prospective borrower to the
following:
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 loan cost;
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, or inability to repay, the
loan on residents who are not borrowers after all borrowers
have died or permanently left the home;
e) The prospective borrower's ability to finance routine or
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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; and,
g) The ability of the borrower to finance alternative
living accommodations such as assisted living or long-term
care nursing home residency, after the borrower's equity is
depleted.
3)Requires that the checklist must be signed by the counselor
and the prospective borrower and returned to the lender with a
certification of counseling.
EXISTING FEDERAL LAW
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
consumer credit transaction, other than a residential
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mortgage, 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 the HECM
loan available to persons 62 years of age and older and
provides that the loans, made against home equity, shall not
come due until the borrower(s) dies, moves out of the home
permanently, or sells the home. Provides, however, that loan
may become due earlier if the borrower(s) fails to pay
property taxes or to maintain the home, as specified in the
loan agreement. Provides that at the time the loan comes due,
the property shall be sold to retire the loan amount with any
residue returning to the estate or heirs of the borrower.
Requires any prospective heir to satisfy the lender's lien
before taking title to the property (12 USC Section 1715z-20
et seq.; 12 CFR Section 226.33.);
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 approved HUD 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. Requires that the protocols 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; 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
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financial or insurance products, unless the lender or
originator maintains firewalls and other safeguards designed
to ensure that individuals participating in the origination of
the HECM loan shall have no involvement with, or incentive to
provide the borrower with, any other financial or insurance
product. Specifies that a prospective borrower shall never be
required to purchase any other financial or insurance product
as a condition of obtaining a reverse mortgage. (12 USC
1715z-20)
EXISTING STATE 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; and,
c) The loan is made by a lender licensed or chartered
pursuant to California or federal law.
2)Specifies several conditions which 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]:
3)Before a lender may accept a final and complete application
for a reverse mortgage loan or assess any fees, that lender
must:
a) Refer the prospective borrower to a housing counseling
agency approved by the United States Department of Housing
and Urban Development (HUD);
b) Provide the borrower with a list of at least five
housing counseling agencies approved by HUD, including at
least two agencies that can provide counseling by
telephone; and
c) Receive a certification from the applicant or the
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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 must include the
date of counseling, and the name, address, and telephone
numbers of both the counselor and the borrower.
4)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;
5)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];
6)Provides that, to the extent that the following rules do not
conflict with federal law and result in the loss of federal
funding, 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];
7)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.];
8)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
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relief, penalties, damages, restitution, and all other
remedies in law 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];
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].
FISCAL EFFECT : None
COMMENTS :
Need for the bill .
According to the author, reverse mortgages are loans that allow
senior homeowners to convert a portion of their home equity into
cash. They are complex and expensive loans with potentially
devastating financial consequences. Yet they are being marketed
with impunity to thousands of seniors in California for whom
they may or may not be suitable. If the senior borrower is
unable to maintain the home or keep up with insurance or tax
payments, or is unable to remain at home, the loan becomes due
and the senior will end up losing a majority of the equity. When
the equity is exhausted, the senior may lose the ability to move
into an independent or assisted living community and otherwise
provide for long-term care.
Existing law has applied the standard of "honesty, good faith,
and fair dealing" to the sale of insurance products to seniors
for 20 years. The standard is also implicit in common law with
regards to contracts and is found in numerous others places in
statute. However, existing law is silent on duties for
lenders, brokers, or others who recommend or sell reverse
mortgages; existing law does not establish a duty to the
borrower; and there are no remedies for breach of a duty when a
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reverse mortgage is recommended that is clearly unsuitable.
The number of federally insured reverse mortgages issued
nationwide has skyrocketed in recent years, growing 116% between
2005 and 2008. Coupled with media reports of sub-prime lenders
moving into the reverse mortgage market and evidence that the
list of seniors suffering from the negative effects of these
loans is growing, SB 660 is not only appropriate, but essential.
SB 660 will heighten the standard of behavior required by
lenders, helping to provide seniors with maximum information
about reverse mortgages and protect seniors from those who would
take financial advantage of them.
On May 4, 2009, this committee heard AB 329 (Feuer) also
relating to reverse mortgages. SB 660 overlaps with AB 329, as
it relates to items that should be disclosed on the written
check-list of items to discuss with a counselor. However, AB
329 contains several items that are not included in AB 329, such
as:
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; and,
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
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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, except as
specified.
To provide further background on this issue, it is worth
restating the Senate Judiciary Committee analysis on this issue.
Duty of honesty, good faith, and fair dealing
To further protect seniors, this bill would state that any
person who recommends the purchase of a reverse mortgage in
anticipation of financial gain would owe the prospective
borrower a duty of honesty, good faith, and fair dealing.
Questions have been raised regarding what those duties, in fact,
would entail.
UCC definition of good faith
With regards to contracts covered by the Uniform Commercial Code
(UCC), "good faith" has been generally defined as "honesty in
fact and the observance of reasonable commercial standards of
fair dealing." (U.C.C. Sec. 1-201(20.)
Similarly, the Restatement Second of Contracts states:
The phrase "good faith" is used in a variety of contexts,
and its meaning varies somewhat with
the context. Good faith performance or enforcement of a
contract emphasizes
faithfulness to an agreed common purpose and consistency with
the justified expectations of
the other party; it excludes a variety of types of conduct
characterized as involving "bad
faith" because they violate community standards of decency,
fairness or
reasonableness. The appropriate remedy for a breach of the duty
of good faith also varies with
the circumstances.
In the present case, all of the three proposed duties (honesty,
good faith, and fair dealing) are found in the broad definition
of "good faith" under the UCC. Thus, the proposed standard
essentially adopts the broad definition of "good faith" under
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the UCC, but does not provide guidance for those who must comply
with the duties imposed.
Violation of duties
Although the bill imposes a broad duty of good faith on
individuals who would recommend the purchase of a reverse
mortgage, the bill does not detail what specific actions would
constitute a violation of that duty. Despite that lack of
specificity, this would not be the first time that California
has statutorily imposed a duty of honesty, good faith, and fair
dealing without detailing the specific acts that violate those
duties. (See e.g. Ins. Code Sec. 785.) As noted above, those
duties are also inherent in contracts themselves (although the
duties may be narrower in some contexts, and parties may specify
what constitutes a breach of the duties).
Questions and Issues for discussion.
1)What do these duties provide to a consumer that is not
available under current law? If these duties are inherent
under most contracts then is it necessary to put them in
statute without clear guidance on what the terms mean, or the
minimum actions required to comply with the standard.
Additionally, with the various prohibitions and requirements
that are contained in AB 329 (Feuer), such as the prohibition
on cross-selling of insurance products, and the prohibition on
the lender and counselor having a financial relationship, do
the duties proposed in this bill provide any additional
consumer protections? Furthermore, do these duties provide
anything more for consumers in exchange for the additionally
liability placed upon lenders.?
2)In relation to the previous point, what do these duties
require of lenders, brokers and others that outside the
services they would provide as part of the transaction. For
instance, if the transaction complies with all state and
federal legal requirements, has the lender or broker met the
standard of good faith, fair dealing and honesty.
3)Are these duties an attempt to require a suitability standard
for reverse mortgages? Do these duties put lenders in a
position of deciding if a product is the best option for a
borrower when they may not have access to all of the
borrower's personal circumstances to make that determination?
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4)Current federal law for HECMs mandates independent counseling
that is intended to make borrowers aware of the potential
pitfalls and disadvantages of a reverse mortgage.
Furthermore, AB 329 clarifies state law to ensure that
borrowers who may apply for non-HECM loans still have the same
counseling requirements. In light of a process that is
designed to raise red flags with consumers, are additional
requirements necessary? Do these duties imply that counseling
is insufficient?
5)Currently, mortgage brokers owe a common law fiduciary duty,
For example, the California Supreme Court in Wyatt v. Union
Mortgage Company (1979) 24 Cal.3d 773 stated that existing
provisions of California law "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." This duty has
never applied to lenders or their employees. While this bill
does impose a fiduciary duty (A previous version did require a
fiduciary duty), the elements of good faith, fair dealing, and
honesty are implicit elements in a fiduciary duty standard.
Arguments in support.
The California Advocates for Nursing Home Reform, sponsor,
states:
Reverse mortgages are being aggressively marketed to
seniors. They are being touted as the smart way to improve the
quality of life with suggestions that they can be used
for things such as vacations and gifts. This claim is very
irresponsible on the part of the industry. What is not stressed
is that these are very expensive loans that will, in a
relatively short amount of time, strip the home of its net
worth. . . .
The state of California has an interest in assuring that
only suitable reverse mortgages are sold
to seniors. Low-wealth seniors who become involved with
unsuitable reverse
mortgage loans run the ultimate risk of becoming a financial
burden to the state. Seniors with
reverse mortgages may find themselves unable to move into
assisted living, as these
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types of facilities require private pay. As a result, seniors
who are no longer capable of
living independently and who cannot afford private pay may have
no option other than to move
into a nursing home that accepts Medi-Cal. California cannot
afford to pick up the
pieces for the thousands of seniors who will be forced to depend
on Medi-Cal for their
expensive nursing home care. . . .
SB 660 offers a reasonable approach to protect seniors from
becoming involved with unsuitable reverse mortgage loans that
may have devastating financial consequences to
the senior borrowers and ultimately to the State of
California.
Arguments in Opposition.
The California Bankers Association, California Financial
Services Association, California Independent Bankers
Association, and California Mortgage Bankers Association write
the following in opposition:
State law currently provides comprehensive consumer
protections for reverse mortgage applicants. Reverse
mortgages insured by the Federal Housing Administration (FHA)
under the Home Equity Conversion Mortgage (HECM) program
sponsored by the U.S. Department of Housing and Urban
Development (HUD) are covered by federal requirements
that provide strong consumer protections. State law for reverse
mortgages and federal requirements (for
HECM's) mandate that reverse mortgage applications
receive independent third party HUD approved counseling prior to
completing a reverse mortgage transaction?
Due to the significant ambiguities in this bill it is
unclear how the new duty of honestly, good
faith, and fair dealing applies to the reverse mortgage
transaction?Further, it is
uncertain what legal exposure exists for a violation of this
duty and what the reverse
mortgage lender can rely on in order to satisfy the duty of
honestly, good faith and fair
dealing. Absent guidance, there is no clear way for a lender to
take steps to ensure that they
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are in compliance with the new duty. Give the unanswered legal
questions and
ambiguities this measure would have a chilling effect on reverse
mortgage sales.
Amendments.
This bill is also going to be heard in Assembly Judiciary
Committee. Any amendments that the committee may wish to offer
would be taken in Judiciary Committee.
Related Legislation
1)AB 329 (Feuer), as amended April 16, 2009: Contains the
provisions described immediately above, and also 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 Senate
Judiciary Committee.
2)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 part of the reverse mortgage transaction, and added
the reverse mortgage translation requirement summarized above.
3)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.
4)AB 2316 (Chan), Chapter 835, Statutes of 2004: Created a Life
and Annuity Consumer Protection Program, dedicated to
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protecting consumers of life insurance and annuity products in
California.
5)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.
REGISTERED SUPPORT / OPPOSITION :
Support
Aging Services of California
California Advocates for Nursing Home Reform
California Alliance for Retired Americans
California Association of Mortgage Brokers
Consumer Attorneys of California
Opposition
California Bankers Association
California Financial Services Association
California Independent Bankers Association
California Mortgage Bankers Association
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081