BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 793|
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THIRD READING
Bill No: AB 793
Author: Eng (D)
Amended: 4/4/11 in Assembly
Vote: 21
SENATE INSURANCE COMMITTEE : 9-0, 6/8/11
AYES: Calderon, Gaines, Anderson, Corbett, Correa, Lieu,
Lowenthal, Price, Wyland
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : 70-0, 5/12/11 - See last page for vote
SUBJECT : Reverse mortgages
SOURCE : Department of Insurance
DIGEST : This bill prohibits an insurance broker or agent
from participating in or employing any party that
participates in the origination of a reverse mortgage,
except as specified.
ANALYSIS :
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.
CONTINUED
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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.
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
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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.
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
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/her age, the interest rate of the loan, the appraised
value of the borrower's home, and the Federal Housing
Administration (FHA) mortgage limits in the borrower's area
(which recently increased, pursuant to enactment of the
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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/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
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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.
Prior Legislation
AB 329 (Feuer), Chapter 236, Statutes of 2009, adds 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 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."
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 7/6/11)
Department of Insurance (source)
Alzheimer's Association
American Association of Retired Persons
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California Advocates for Nursing Home Reform
Congress of California Seniors
Consumer Federation of California
ARGUMENTS IN SUPPORT : 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."
ASSEMBLY FLOOR : 70-0, 5/12/11
AYES: Achadjian, Allen, Ammiano, Atkins, Beall, Bill
Berryhill, Block, Blumenfield, Bonilla, Bradford,
Brownley, Buchanan, Butler, Charles Calderon, Campos,
Carter, Chesbro, Cook, Davis, Dickinson, Donnelly, Eng,
Feuer, Fletcher, Fong, Fuentes, Furutani, Beth Gaines,
Galgiani, Gatto, Gordon, Grove, Hagman, Halderman, Hall,
Harkey, Hayashi, Hill, Huber, Hueso, Huffman, Jeffries,
Jones, Knight, Lara, Logue, Ma, Mansoor, Mendoza, Miller,
Monning, Morrell, Nestande, Nielsen, Norby, Olsen, Pan,
Perea, V. Manuel P�rez, Silva, Skinner, Smyth, Solorio,
Swanson, Valadao, Wagner, Wieckowski, Williams, Yamada,
John A. P�rez
NO VOTE RECORDED: Alejo, Cedillo, Conway, Garrick, Gorell,
Roger Hern�ndez, Bonnie Lowenthal, Mitchell, Portantino,
Torres
JJA:kc 7/6/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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