BILL ANALYSIS
SB 660
Page 1
Date of Hearing: July 9, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 660 (Wolk) - As Amended: July 8, 2009
As Proposed to Be Amended
SENATE VOTE : 23-15
SUBJECT : Reverse Mortgages
KEY ISSUES :
1)Should a person or entity that sells reverse mortgages owe to
the prospective borrower a duty of honesty, good faith, and
fair dealing?
2)Should, AS IS ALSO REQUIRED IN ab 329 (fEUER), a person who
seeks a reverse mortgage be provided with a checklist
highlighting certain subjects that the borrower should discuss
with an HUD-certified reverse mortgage counseling agency?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
Consistent with AB 329 (Feuer), this bill seeks to give greater
consumer protections to senior citizens considering a reverse
mortgage. Reverse mortgages give persons of retirement age and
with limited income the opportunity to stay in their homes while
converting home equity into tax-free income or lump some
payments. Unlike a conventional "forward" mortgage where the
borrower makes payments to the lender to bring down debt and
increase equity, in a reverse mortgage the lender makes payments
to the borrower so that debt increases and equity decreases.
While this is a valuable option for many seniors, reverse
mortgages are not for everyone. Many seniors reportedly obtain
mortgages that they may not need, and both consumer advocates
and senior groups agree that such mortgages are risky when
combined with annuities and other insurance products. As a
result, the author contends, seniors are losing equity in their
homes. This bill seeks to address this problem in two ways.
First, it imposes on any person who sells reverse mortgages "a
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duty of honesty, good faith, and fair dealing." Second, it
would require enhanced disclosures to prospective borrowers,
including a requirement that borrowers and counselors consider
and sign a prescribed checklist highlighting the risks of
reverse mortgages and alternative means of meeting financial
needs. The bill is sponsored by senior and consumer advocates.
It is opposed by organizations representing lending
institutions, primarily on the grounds that the "duty" created
by this bill is not clearly enough defined to provide guidance
to lenders and will likely lead to increased litigation. The
prior Committee amended the "duty" provision to specify that
compliance with all statutory requirements pertaining to reverse
mortgages may be cited as evidence of meeting of the duty of
honesty, good faith, and fair dealing. It does not appear,
however, this amendment will remove the opposition.
SUMMARY : Provides that a person or entity that sells reverse
mortgages owes to the prospective borrower a duty of honesty,
good faith and fair dealing, and prohibits a lender from
accepting a reverse mortgage application unless the borrower and
counselor complete a prescribed checklist relating to the risks
of, and alternatives to, reverse mortgages. Specifically, this
bill :
1)Provides that a lender, broker, person, or entity who
recommends the purchase of a reverse mortgage in anticipation
of financial gain owes to the prospective borrower a duty of
honesty, good faith and fair dealing. Specifies that the
codification of this duty in this bill does not limit or
narrow any other legal duty. Specifies further that
compliance with the provisions of the reverse mortgage statute
and all other applicable law may be cited as evidence in
support of compliance with the duty.
2)Specifies that a lender, broker, person, or entity shall not
be deemed to have breached the duty set forth above based
solely on the acts or omissions of the counseling agency.
3)Provides that no reverse mortgage loan shall be taken by a
lender unless the loan applicant, prior to receiving
counseling, has received from the lender a prescribed form
advising the borrower about the need to obtain counseling and
stating that a reverse mortgage is a complex, legally binding
transaction with important implications for the borrower's
estate.
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4)Requires, in addition to the notice required above, that the
prospective borrower receive, prior to counseling, a written
checklist that conspicuously alerts the prospective borrower
to all of the following:
a) How unexpected medical and other events that cause the
borrower to move out of the home earlier than expected will
impact the cost of the loan.
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 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
catastrophic home repairs, especially if maintenance is a
factor that determines when the mortgage becomes due.
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.
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.
5)Provides that the checklist required above be signed by the
agency counselor and by the prospective borrower and returned
along with a required counseling certification, as specified.
Provides that the loan shall not be completed until the signed
checklist is provided to the lender. Specifies that a copy of
the checklist shall also be provided to the borrower.
EXISTING FEDERAL LAW :
1)Establishes, within the United States Department of Housing
and Urban Development (HUD), the Home Equity Conversion
Mortgage (HECM) program to provide federal insurance for
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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.)
2)Requires that all applicants for an insured HECM loan receive
adequate counseling from an independent third party that is
not, either directly or indirectly, associated with or
compensated by the lender, loan originator, or loan servicer,
or by any party associated with the sale of annuities,
investments, long-term care insurance, or any other type of
financial or insurance product. Requires the lender, at the
time of initial contact, to provide the borrower with a list
of approved HUD counseling agencies. (12 USC Section 1715z-20
(d) (2); 24 CFR 206.41.)
3)Requires all HECM loan counselors to be approved by HUD and
meet HUD standards, as specified. Further requires the HUD
Secretary to develop uniform counseling protocols by July 30,
2009. Protocols shall require a qualified counselor to
discuss, generally, financial options other than a reverse
mortgage, the financial implications of reverse mortgages,
including any tax consequences, or the affect of the loan on
eligibility for government assistance programs. (12 USC
1715z-20 (f) (1)-(5); 24 CFR Section 214.103.)
4)Prohibits the lender or any person involved in the origination
of the HECM from participating in, being associated with, or
employing any party that participates in the sale of other
financial or insurance products, unless the lender or
originator maintains firewalls and other safeguards designed
to ensure that individuals participating in the origination of
the HECM loan shall have no involvement with, or incentive to
provide the borrower with, any other financial or insurance
product. Specifies that a prospective borrower shall never be
required to purchase any other financial or insurance product
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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).)
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).)
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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)Provides that all insurers, brokers, agents, and others
engaged in the transaction of insurance owe a prospective
borrower insured who is 65 years of age or older, a duty of
honesty, good faith, and fair dealing. Specifies that this
duty is in addition to any other duty, whether express or
implied, that may exist. (Insurance Code Section 785.)
COMMENTS : The last decade has seen an explosion in the reverse
mortgage market. Reverse mortgages allow persons 62 years of
age of older to convert home equity into tax-free monthly income
or a lump sum cash payment to spend as they wish. In a
conventional "forward" mortgage, the borrower makes payments to
the lender so that debt decreases and equity increases. In a
"reverse" mortgage, the lender makes payments to the borrower so
that debt increases and equity decreases. The borrower
generally does not repay the loan until the last borrower dies,
sells the home, or moves out. However, a lender may demand
repayment if the borrower fails to pay property taxes or allows
the home to fall into disrepair. Most reverse mortgages are
insured by the Federal Housing Administration (FHA) through the
Home Equity Conversion Mortgage (HECM) program administered by
the U.S. Department of Housing & Urban Development (HUD). These
federally-backed loans must meet certain requirements, including
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independent third party counseling by a HUD-approved housing
agency. Though fewer in number, so-called "proprietary" reverse
mortgages are not federally insured and are not subject to the
same restrictions and requirements as the HECM loans. Yet, for
the most part, they operate the same way: the borrower receives
payments against the home equity, and the loan generally does
not become due until the borrower dies, moves out, or sells the
home.
For many "cash poor, equity rich" seniors, a reverse mortgage
often appears to make good economic sense. But reverse
mortgages can also be very costly. In addition to
higher-than-usual origination fees, closing costs, compound
interest, and servicing fees, the borrower is also required to
pay an insurance premium (worth about 2% of the loan) that
protects the lender in case the value of the property falls
below the amount owed on the loan. The total annual cost of a
reverse mortgage is generally much greater the shorter the loan
period. For example, the hoped-for advantages of a reverse
mortgage backfires if a senior becomes ill or takes a fall and
is forced to move out of the home early. Leaving the home makes
the loan come due, and the senior must repay the high up-front
costs and compounded interest while having received little or no
benefit.
Often, according to groups like AARP and Consumers' Union,
senior citizens are unaware that their financial needs may be
better met by alternative and less costly means. For example,
for smaller and immediate needs, the borrower can obtain a home
equity line of credit. If the senior is obtaining a reverse
mortgage in order to pay property taxes, they may not be aware
of local and state property tax deferral programs available to
seniors with fixed incomes. Finally, where a senior lacks funds
to pay for increased medical costs, they may be eligible for
other forms of government aid, including Medi-Cal. While
reverse mortgages often provide a valuable tool for some senior
citizens, there are often more appropriate alternatives. AARP,
for example, while generally praising the benefits of reverse
mortgages in appropriate situations, generally recommends
exploring all other options before obtaining mortgages that may
not be needed and will eventually deplete home equity.
Moreover, AARP advises that using reverse mortgage proceeds to
buy annuities or invest in other products is almost never a good
idea. Even some lending institutions are reportedly in
agreement that reverse mortgage proceeds should not be used to
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invest in other financial products; yet the practice continues,
as numerous reports and law suits attest.
The Growth of the Reverse Mortgage Market and Previous
Legislative Responses : Although proprietary reverse mortgages
in some form or another have been around since at least the
1960s, it was not until the development of the federal HECM
reverse mortgages in the late 1980s and early 1990s that they
became well known. However, the federal program remained
relatively small and stagnant until 2003, when the number of
reverse mortgages suddenly sky-rocketed and became the fasting
growing sector of the mortgage lending industry. The reason for
this rapid growth is not entirely clear, though most reports
point to more aggressive marketing; rising home values; the
aging of the population; and the collapse of the sub-prime
lending crisis pushing brokers, lenders, and loan originators
into the reverse mortgage market. (See e.g. "Demand for Reverse
Mortgages Climbs," Wall Street Journal, January 22, 2009; "Shady
Subprime Lenders Creeping into Federal Mortgage Program,"
Financial Week, January 12, 2009; "Reverse Mortgages: Bad Rap or
Bad Idea?, San Francisco Chronicle, August 1, 2008.) While this
growth may be subject to fluctuations, overall growth is
expected to continue as the population ages.
The first response to this growth in California came with the
enactment of AB 456 (Chapter 797, Stats. of 1997), which defined
"reverse mortgage" and set out minimum requirements that more or
less mirrored then-prevailing federal requirements. (Civil Code
Section 1923 et seq.) While the federal requirements applied
only to the HECM loans, the California provisions apply to both
federally-backed and so-called proprietary loans that are not
subject to HECM requirements. More recently AB 1609 (Chapter
202, Stats. of 2006) added counseling requirements and
restrictions concerning bundling reverse mortgages and annuities
(at least until after the closing and any right of rescission),
that again mirrored federal regulations but applied to HECM and
proprietary loans.
This bill seeks to further advance state regulation of the
reverse mortgage market in two ways: First, it states that any
lender, broker, or person who sells reverse mortgages owes to
the prospective borrower "a duty of honesty, good faith, and
fair dealing." Second, as is the case with AB 329 (Feuer), it
enhances existing notice requirements in state law and requires
that prospective borrowers must be provided with a "checklist"
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that alerts them to the risks of and alternatives to reverse
mortgages. The borrower is instructed to go over this list with
a certified counselor, and the checklist must be signed by both
the borrower and the counselor before the reverse mortgage loan
application can be completed. Because the checklist provision
of this bill is substantially similar to AB 329, which was
already heard by the Committee, the remainder of this analysis
will focus on the "duty" issue.
What is a Duty of Honesty, Good Faith, and Fair Dealing? The
"duty" language in this bill is closely modeled on Insurance
Code Section 785, which imposed upon persons who sold insurance
products to persons 65 years of age or older "a duty of honesty,
good faith, and fair dealing." The logical connection between
that provision and this bill seems fairly obvious: both seek to
create a heightened duty among persons who sell complex
financial products to elderly persons. Other places in
California law make the assumption that people who engage in
commercial and financial transactions with elderly persons are
held to a higher ethical standard, as is implicit in the state
Financial Elder Abuse statute and in Insurance Code Section 786,
which gives persons over 65 years of age 30 days to rescind an
insurance policy. These laws do not necessarily reflect a
paternalistic assumption that senior citizens inevitably have
difficulty understanding complex financial transactions; it is
simply a frank acknowledgment that some elderly persons
experience cognitive changes, as well as changed living
situations, which make them more vulnerable to certain marketing
techniques. Existing law clearly recognizes that senior
citizens deserve something more protective than caveat emptor
and the unrestrained selfishness of the marketplace.
As noted below, opponents allege that "honesty, good faith, and
fair dealing" are such vague and ill-defined terms that they
provide no guidance to persons who must comply with the law and
will provide an open invitation for litigation. However, terms
like "good faith" and "fair dealing" have been used for
centuries in both common law and statute. All contracts, for
example, presume a "covenant of good faith and fair dealing,"
yet this does not inhibit people from making contracts nor
prevent courts from determining whether a party to a contract
has breached the implied covenant of good faith and fair
dealing. But perhaps even more telling, the Insurance Code has
imposed a duty of honesty, good faith, and fair dealing on
persons selling insurance to the elderly for nearly 20 years and
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there is no evidence that this has led to a litigation
explosion. Nor is there any evidence that the duty in the
Insurance Code has had any chilling effect on the selling of
insurance to persons 65 years of age or older.
Opponents are correct that the bill does not provide any
examples of what specific kinds of actions on the part of a
lender might constitute a breach of the duty of honesty, good
faith, and fair dealing. However, this is not the first time
that a statute has codified accepted common law terminology, and
statutes by their very nature tend to be general, since
legislation cannot possibly anticipate every possible instance
that would constitute a violation. In codifying a common law
rule, a legislature does not prescribe or prohibit specific
kinds of conduct so much as it sets forth general principles by
which parties are expected to conduct themselves. Insurance
Code Section 785, after which the duty provision in this bill is
modeled, implies that persons who sell financial products owe a
higher duty of care to senior citizens than they do to other
customers; otherwise, there would have been no reason for adding
this language into the Insurance Code. Even if the provision
was simply an attempt to codify the existing common law covenant
that already applies to all contracts, there would be no reason
to apply it only to contracts involving senior citizens. It is
a standard principle of statutory interpretation that words are
not meant to be superfluous, but are added for a reason. The
duty created by this statute, like the similar duty in the
Insurance Code, would seem to mean that, at a minimum, a person
selling financial products to senior citizens should not take
undue advantage of the buyer's age. It would seem to mean, at a
minimum, that the seller not try to push a product on a senior
citizen without having some reasonable belief that the senior
citizen will derive a benefit. No doubt the vast majority of
the lenders represented by the opponents conduct themselves in a
manner that meets this modest duty, but one can find facts in
news reports and trial court pleadings to suggest that not all
lenders do so. (See e.g. Assembly Judiciary Committee, Analysis
of AB 329. April 21, 2009.)
There is nothing new about imposing heightened duties on those
who sell financial products, including mortgages. For example,
in 1979 the California Supreme Court held that, even in the
absence of a statute, mortgage loans brokers are expected to
fully and accurately disclose all terms to borrowers and "to act
always in the utmost good faith toward their principals."
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(Wyatt v. Union Mortgage Company (1979) 24 Cal. 3d 773.) This
bill appears to recognize that these other kinds of duties
exists, which is presumably why the bill states that the duty it
sets forth does not limit "any other duty" that a lender or
broker may have. That is, brokers who sell reverse mortgages,
under the Wyatt holding, may already have a higher, fiduciary
duty to borrowers that goes beyond a "duty of honesty, good
faith, and fair dealing."
Contract and Tort Remedies For Breach of Covenant of Good Faith
and Fair Dealing : At common law, every contract imposes upon
each party an "implied covenant of good faith and fair dealing."
(Restatement 2d Contracts, Section 205.) This bill apparently
seeks to codify this duty with respect to the sale of reverse
mortgages, albeit with the added requirement of "honesty." In
contract law, the breach of the covenant of good faith and fair
dealing would generally void the contract and entitle the
non-breaching party to compensatory damages or restitution. As
a matter of contract law, damages would be "determined by the
nature of the breach and standard contract principles." (Foley
v. Interactive Data Corp. (1988) 47 Cal. 3d 654, 683-84.) In
the case of a reverse mortgage, this could possibly mean
rescission of the contract and return of loan fees, as a court
deemed appropriate given the nature of the breach. In the
Banking & Finance Committee, however, opponents claimed that the
duty provision in this bill might also entitle a prevailing
plaintiff to damages in tort, which might include damages for
"pain and suffering" and possibly punitive damages as well.
While it is true that tort damages are generally more expansive
than contract damages, it is not clear that a court would award
tort damages under the duty created by this bill. As the
California Supreme Court has noted, damages for breach of the
covenant of good faith and fair dealing are generally determined
by contract principles, except "in the context of insurance
contracts." (Id. at 684.) The exception for insurance
contracts in large measure reflects the "special" or "fiduciary"
nature of the insurer-insured relationship. (See e.g. Id. at
684-685; Gruenberg v. Aetna Ins. Co. (1973) 9 cal 3d 566, 575;
and Direct Buying Service v. Standard Oil (1984) 36 Cal. 3d 752,
768-769 (stating that the propriety of a tort action for breach
of the implied covenant was rooted in the "special relationship"
of insurer and insured.) However, the court has been reluctant
to extend this reasoning beyond the insurance context. Indeed,
in Foley v. Interactive Data Corp (1988), the majority affirmed
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a lower court dismissal of a claim for tort damages for breach
of the covenant in an employment contract. In doing so, the
court expressly rejected the reasoning of a handful of appellate
court opinions that permitted tort damages in breach of
employment contract cases. The court reasoned that the
application to the insurance context was already a "major
departure from traditional principles of contract law," and that
the court should "consider with great care" claims seeking to
extend that exceptional approach to other contexts. (Foley,
supra at 690; see also Cates Construction v. Talbot Partners
(1999) 21 Cal 4th 28, 44 (refusing to extend remedy for tortuous
breach to performance bonds for reasons similar to those
articulated in Foley.) Indeed, more recently the California
Supreme Court has even refused to apply tort remedies to some
insurance contracts if the nature of the breach did not warrant
it. (Jonathan Neil & Associates v. Jones (2004) 33 Cal. 4th 917,
refusing to apply tort remedies when the insurance company's
breach involved premium overcharges rather than denial of
coverage.)
In short, it appears that a court would only permit the
additional damages available in an action in tort under the duty
codified in this bill if it construes the relationship between
the lender and borrower as a "special relationship" akin to the
fiduciary relationship between insurer and insured. Thus far,
as opponents themselves have noted, the courts have not
construed the lender-borrower relationship as a fiduciary
relationship.
How does the duty created by this bill compare to a "fiduciary
duty" ? The Assembly Banking & Finance Committee analysis raised
a concern that the duty created in this bill might effectively
become a fiduciary duty, even without using that precise term.
However, the duty of "good faith" or "fair dealing," as used in
existing law, has never been assumed to rise to the level of a
fiduciary duty. Although a fiduciary duty certainly presumes
honesty, good faith, and fair dealing as a baseline requirement,
the fiduciary duty also implies much more than this. A
fiduciary is expected to consider the best interest of the
person to whom the duty is owed and, when conflicting, to put
the interest of that person ahead of the fiduciary's own
interests. According to the Wyatt rule, noted above, a licensed
"broker," who acts as the agent of his or her client, owes that
client a fiduciary duty. However, licensed brokers are not
always involved in reverse mortgages transactions. Thus one
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apparent purpose of this bill is to ensure that all "persons"
who sell reverse mortgages, whether "brokers" or not, owe a
heightened duty to prospective borrowers, though clearly not a
fiduciary duty. A court would likely conclude that if the
Legislature had intended to create a fiduciary duty, it could
have said so. (Indeed, that an earlier version of the bill did
say so demonstrates that the subsequent rejection of a fiduciary
duty was self-conscious and purposeful.)
Recent Amendments to Duty Provision : This bill was originally
scheduled to be heard on June 29th in the Assembly Banking &
Finance Committee and on June 30th in this Committee. However,
the prior Committee put the bill over an additional week to
consider amendments to the duty provision. Opponents originally
requested an amendment that would have stated that compliance
with the reverse mortgage statute would create a "rebuttable
presumption" that a person has met the duty of honesty, good
faith, and fair dealing. However, the author believed that such
an amendment would at best negate the duty provision and, at
worst, would have permitted bad faith compliance. The proposed
amendment, in other words, ignored the possibility that a person
could comply with the technical requirements of the statute
while still acting without honesty, good faith, or fair dealing.
As a compromise effort, the author agreed to an amendment that
would allow a lender to cite compliance as evidence of meeting
the duty of honesty, good faith, and fair dealing. That is, the
"rebuttable presumption" favored by the opponents would have
created a presumption that compliance automatically sufficed to
meet the duty, unless the person alleging the breach of the duty
could show evidence to rebut. The author's proposed amendment,
however, would allow a person offering a reverse mortgage to
cite compliance with the statute as evidence of meeting the duty
without necessarily creating a conclusive presumption that the
duty had been met. Specifically, the recent amendment reads as
follows:
1923.1. (a) 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.
The duties set forth in this subdivision shall not be
construed to limit or narrow any other duty of a lender,
broker, person, or entity. Compliance with this chapter
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and all other applicable law may be cited as evidence
demonstrating compliance with the duties of this
subdivision.
Does the Author Wish To Retain the Amendment Taken in the
Banking & Finance Committee? One could argue that the above
amendment taken in the Banking & Finance Committee does not add
anything to existing law. That is, a lender or broker would
presumably be free under existing law to introduce any evidence
that it thought would bolster its defense, including evidence
that it had complied with all statutory requirements applicable
to the sale of reverse mortgages. Given that the author only
took this amendment in an effort to assuage the opposition - and
it has apparently failed to do so - the author and Committee may
wish to consider whether the amendment is in fact necessary. On
the other hand, the amendment is surely preferable to having
compliance create a "rebuttable presumption" of meeting the duty
which, as noted above, arguably renders the duty meaningless as
an additional requirement. The amendment above, which the
author agreed to after consultation with the staff of both the
Judiciary and Banking and Finance Committees, makes it clear at
least that compliance is a prerequisite of the duty, but not the
totality of the duty. The author, it would appear, adopted this
amendment because she believes that mere compliance with the
letter of the law must be done with honesty, good faith, and
fair dealing.
Proposed Author Amendment : In order to clarify that a lender
cannot be liable solely for the acts or omissions of a
counseling agency, the author wishes to make the following
amendment to proposed subdivision (b) of proposed Section
1923.1:
(b) A lender, broker, person, or entity shall not be deemed
to have breeched the duty set forth in subdivision (a)
based solely on the actions or omissions of the counseling
agency pursuant to this chapter.
ARGUMENTS IN SUPPORT : According to the sponsor, California
Advocates for Nursing Home Reform (CANHR), heightened duties for
sellers of reverse mortgages are necessary "because reverse
mortgages are very complex and expensive loans and, when
unsuitable, can devastate a senior's estate plan." CANHR points
out that reverse mortgages are risky, especially when
unanticipated, but not uncommon, events occur. For example,
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CANHR, points out that although a reverse mortgage holds out the
promise that the senior can stay in the home for the rest of his
or her life, without having to make any mortgage payments, a
number of unanticipated events can make the mortgage come due.
For example, an illness or injury that required long-term
nursing care might make the loan come due long before the senior
has derived any benefit. In addition, CANHR claims, many
seniors are unaware that the lending institutions can demand
payment if the senior citizen fails to adequately keep the home
in good repair. For all of these reasons and more, a senior
citizen should consider all possible consequences and less
costly alternatives, which the checklist, which must be signed
by the counselor and borrower, will force the senior to do. In
addition, the duty provision in this bill will force the lender
to give good faith consideration to whether a loan is
appropriate in light of the senior's circumstances.
Aging Services of California, an association of non-profit
providers of senior housing and residential care, argues that
the recent sub-prime mortgage crisis and the fact that senior
citizens nationwide hold about $4 trillion in home equity should
alert us to potential problems that may lie ahead in the reverse
mortgage market. Aging Services suggest that many of the same
players that sold the irresponsible mortgages that fueled the
sub-prime crisis are moving into the reverse mortgage market.
Aging Services stresses, however, that the purpose of this bill
is not to prohibit the sale of reverse mortgages. Instead, this
bill offers modest protections, sets forth a minimum standard
for sellers and lenders, and creates a useful checklist that
will force borrowers to give more consideration to risks and
alternatives when discussing their situation with a counselor.
"Without such protections," Aging Services concludes, "thousands
of seniors will be sold reverse mortgages that radically affect
established estate plans, retirement destinations, and even care
for dependent children." Finally, Aging Services writes that
its members have encountered many seniors who find that they
cannot enter a senior living facility as planned because they
have used up the equity in their home through a reverse
mortgage. Without home equity to pay for medical care, seniors
"will find themselves on Medi-Cal at taxpayers' expense, an
expense that the state cannot afford."
ARGUMENTS IN OPPOSITION : As noted above, the financial
institutions that oppose this bill focus almost exclusively on
the bill's "duty of honesty, good faith, and fair dealing."
SB 660
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"Absent clarification," opponents argue, "these ambiguous duties
may expose lenders to legal liability and have a chilling effect
on the reverse mortgage industry."
Opponents also point out that existing state and federal law
already provides comprehensive consumer protections for reverse
mortgage applicants. The vast majority of these mortgages,
opponents claim, are federally insured and covered by strong
consumer protections. Both state and federal law, opponents
add, already require that all borrowers receive HUD-certified
counseling before a loan application may be completed.
Citing the Senate Judiciary Committee analysis, opponents note
that the bill does not detail what specific action would
constitute a violation of the "duty of honesty, good faith, and
fair dealing," and as such, cannot provide any guidance to those
who must comply with the provision. Therefore, opponents claim,
the bill creates uncertainty as to "what legal exposure exists
for violation of this duty and what the reverse mortgage lender
can rely on in order to satisfy the duty of honesty, good faith,
and fair dealing. Absent clear guidance, there is no clear way
for a lender to take steps to ensure that they are in compliance
with the new duty. Given the unanswered legal questions and
ambiguities, this measure would have a chilling effect on
reverse mortgage sales."
Pending Related Legislation : AB 329 (Feuer) updates
California's state reverse mortgage law to incorporate recent
changes in federal law relating to conflicts of interest and
cross-selling of reverse mortgages with other financial
products; ensures that recent federal protections will apply to
both federally-backed and non-federally-backed loans in
California; enhances notice requirements and, like this measure,
requires a checklist that must be signed by both the borrower
and a HUD-certified counselor before the loan application can be
completed. (Passed off Assembly Floor by a 68-2 vote and passed
out of Senate policy committee. On Senate floor.)
REGISTERED SUPPORT / OPPOSITION :
Support
California Advocates for Nursing Home Reform (sponsor)
AARP
Aging Services of California
SB 660
Page 17
California Alliance for Retired Americans (CARA)
California Association of Mortgage Bankers
Opposition
California Bankers Association
California Financial Services Association
California Independent Bankers Association
California Mortgage Bankers Association
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334