BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
AB 793 (Eng) Hearing Date: June 8, 2011
As Amended: April 4, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would prohibit an insurance broker or agent from
participating in or employing any party that participates in the
origination of a reverse mortgage, except as specified.
DIGEST
Existing law
Existing California Insurance Code
1) Specifies that insurers, brokers, agents, and others
engaged in the transaction of insurance owe a prospective
insured who is 65 years of age or older, a duty of honesty,
good faith, and fair dealing.
2) Provides several exceptions to this duty, including
Medicare supplement insurance, long-term care insurance,
disability coverage through the insured's employer, and
certain travel accident insurance.
Other Existing California Law
1) Defines a reverse mortgage as a nonrecourse loan secured
by real property, which 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 California or federal law.
AB 793 (Eng), Page 2
2) Specifies several conditions which must be satisfied by
lenders who make reverse mortgage loans, and several
prohibitions that apply to those lenders.
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.
4) Prohibits a lender or any other person that participates
in the origination of a reverse mortgage from doing either
of the following:
a. Participate in, be associated with, or
employ any party that participates in or is
associated with any other financial or insurance
activity, unless the lender maintains firewalls and
other safeguards designed to ensure that individuals
participating in the origination of the mortgage
shall have no involvement with, or incentive to
provide the prospective borrower with, any other
financial or insurance product; or,
b. Refer the prospective borrower to anyone for
the purchase of an annuity or other financial or
insurance product.
This bill
1)Prohibits an insurance broker or agent from participating in,
being associated with, or employing any party that
participates in the origination of a reverse mortgage, unless
that agent or broker maintains procedural safeguards designed
to ensure that the agent or broker transacting insurance has
no direct financial incentive to refer the policyholder to a
reverse mortgage lender.
2)Generally prohibits individuals transacting insurance from
receiving compensation, commission, or direct incentive for
providing reverse mortgage borrowers with an insurance product
that is connected to or a result of the reverse mortgage.
AB 793 (Eng), Page 3
3)Creates an exception to the general prohibition on
compensation if the agent or broker offers title insurance,
hazard, flood, or other peril insurance or similar products
that are customary and normal under a reverse mortgage loan.
COMMENTS
1) Purpose of the bill According to the Author, "This bill will
address abusive cross promotions by returning the concept of
a reverse mortgage loan to its original form. Specifically,
this legislation will prohibit a broker, agent, or others
engaged in the transaction of insurance, except as provided,
from participating in, being associated with, or employing
any party that participates in or is associated with, the
origination of a reverse mortgage, or referring a client or
prospective client to any party that participates in or is
associated with the origination of a reverse mortgage."
2) Background and Discussion: This bill is patterned as the
Insurance Code complement to AB 329 (Feuer) which was
enacted in 2009 to prohibits a lender or any other person
that participates in the origination of a reverse mortgage
from either participating in, being associated with, or
employing any party that participates in or is associated
with any other financial or insurance activity, unless the
lender maintains firewalls and other safeguards to ensure
individuals in the mortgage origination process shall have
no involvement with, or incentive to provide the prospective
borrower with, any other financial or insurance product nor
shall they refer the prospective borrower to anyone for the
purchase of an annuity or other financial or insurance
product.
3) Under Suitability in Annuity Transactions legislation being
considered this year (SB 715 (Calderon et al) and AB 689
(Blumenfield), life insurers will face a heightened level of
responsibility to evaluate annuity fitness, specifically
including instances where a consumer has obtained a reverse
mortgage. It appears that framework will assist in adding
clarity to when an insurer's annuity sale to a customer who
may have obtained at an earlier time a reverse mortgage is
appropriate.
AB 793 (Eng), Page 4
4) Reverse Mortgage Background The vast majority of reverse
mortgages originated at the present time are so-called Home
Equity Conversion Mortgage (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 nine percent, and
a home qualifying for $100,000, a 65-year-old could borrower
up to 34 percent of the home's value; a 75-year-old could
borrow up to 47 percent of the home's value; and, an
85-year-old could borrow up to 64 percent 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.
A variety of homes are eligible, including single-family
dwellings and certain 2-4 unit dwellings and the FHA
administers another 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", which consists of 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;
AB 793 (Eng), Page 5
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
two percentage points per year, and by no more than five
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.
1)Summary of Arguments in Support:
a. The author and the Department of Insurance
(Sponsor) state that a reverse mortgage should be an
option of last resort only for seniors with an
immediate need for cash who are unable to obtain the
cash by other means. The Department of Insurance
states that this bill would provide another level of
protection for seniors from being persuaded to use the
proceeds of a reverse mortgage to purchase
inappropriate insurance products, primarily long term
care insurance and annuities.
b. The Department states that there is an
increasing need for this bill as the growth of the
reverse mortgage business has been accompanied by
aggressive marketing and abuse, especially when
reverse mortgages are marketed along with insurance
products or financial investment vehicles. This bill
AB 793 (Eng), Page 6
can help to return the concept of a reverse mortgage
to its original form.
c. The Alzheimer's Association, the Congress of
California Seniors, the Consumer Federation of
California, the American Association of Retired
Persons (AARP), and the California Advocates for
Nursing Home Reform state that some insurance agents
are aggressively pursuing seniors and convincing them
to tap into their home equity and purchase insurance
products. These organization state that it is not
suitable to use reverse mortgages to fund annuities
because annuities yield substantially less interest
for the senior (1.5 to 3%) than what the reverse
mortgage loan costs (5 to 8%). thus, these
organizations support the additional consumer
protection offered by AB 793.
2) Summary of Arguments in Opposition:
a. The Metropolitan Life Insurance Company
(MetLife) and the National Reverse Mortgage Lenders
Association express concern for possible unintended
consequences of the bill and have a position of
"opposes unless amended". They have proposed language
in an attempt to eliminate the possibility of
inadvertent violations of the bill's proscriptions in
circumstances where a consumer, having obtained a
reverse mortgage, subsequently seeks to obtain a
subject insurance product.
3) Amendments:
None proposed
4) Prior and Related Legislation:
AB 329 (Feuer) (Chapter 236, Statutes of 2009) added the Reverse
Mortgage Elder Protection Act of 2009 which was enacted to
prohibit a reverse mortgage lender or mortgage broker from
participating with, employing, or making referrals to, an
individual involved in the sale of financial or insurance
products. The bill's Legislative Findings and Declarations
included statements ascribed to the American Association of
Retired Persons (AARP) that "The AARP strongly advises against
AB 793 (Eng), Page 7
using the proceeds of a reverse mortgage for the purchase of
annuities or other financial investments, since the high cost of
obtaining a reverse mortgage often exceeds any likely returns."
SB 715 (Calderon) and AB 689 (Blumenfield) are substantively
identical bills proposing the adoption of suitability in the
sale of annuity transaction law, substantively based upon an
NAIC Model are both pending this year. These bills require that
annuity sales be "suitable" to the financial situation of the
buyer, based upon 13 mandatory factors that are deemed
"reasonably appropriate to determine the suitability of a
recommendation". Among the included factors is "(w)hether or not
the consumer has a reverse mortgage".
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Department of Insurance (Sponsor)
Alzheimer's Association
American Association of Retired Persons (AARP)
California Advocates for Nursing Home Reform
Congress of California Seniors
Consumer Federation of California
Opposition
Metropolitan Life Insurance Company (MetLife) - Oppose Unless
Amended
National Reverse Mortgage Lenders Association - Oppose Unless
Amended
Consultant: Ken Cooley (916) 651-4110