BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 2010 (Bonilla)
As Amended April 23, 2012
Hearing Date: July 3, 2012
Fiscal: No
Urgency: No
BCP
SUBJECT
Reverse Mortgages: Counseling
DESCRIPTION
This bill would require the prospective borrower to receive
reverse mortgage counseling in person, unless the borrower
elects to receive the counseling in another manner.
BACKGROUND
A reverse mortgage is a loan that allows a homeowner who is aged
62 or older to borrow against the equity of his or her home in
order to get immediate access to funds, either in a lump sum or
through periodic payments. The principal and interest on the
loan generally will not come due until the borrower dies or
sells the home.
Reverse mortgages can be risky for certain seniors, and both
federal and state law mandate counseling before entering into a
reverse mortgage transaction. Regarding the risks posed to
seniors, the Wall Street Journal's April 11, 2009 article
entitled "Reverse Mortgage: Get Cash, But Use Caution" noted:
While it makes sense to suspend withdrawals from beaten-down
retirement accounts, taking out a reverse mortgage is an
expensive way to achieve this, warns Vincent Russo, an
elder-law specialist with several offices in New York.
Homeowners pay a 2�percent] origination fee on the first
$200,000 they borrow plus 1�percent] on the rest, with the
total capped at $6,000. But origination fees are only one
(more)
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part of the overall cost of these loans, which can total as
much as 10�percent] of a home's value, according to David
Certner of AARP, the advocacy group for older people. . . .
Still, using a reverse mortgage to finance the "good life"
can be risky. With a reverse mortgage, you're likely to
consume a large portion -- if not all -- of your home
equity. As a result, if you need cash for future needs,
including long-term care, your home equity will no longer be
available.
To further enhance the current protections for seniors, this
bill would require the mandatory reverse mortgage counseling to
be conducted in person unless the applicant elects to receive
the counseling in another manner.
CHANGES TO EXISTING LAW
Existing federal regulations define a "reverse mortgage" as a
nonrecourse consumer credit obligation in which one or more
advances are secured by the consumer's "principal dwelling," but
no payments from the consumer are due until: (1) the consumer
dies; (2) the dwelling is sold; or (3) the consumer stops
occupying the dwelling as a principal dwelling. (12 C.F.R. Sec.
226.33.)
Existing state law defines a "reverse mortgage" as a nonrecourse
loan secured by a borrower's owner-occupied principal residence
which: (1) provides cash advances based on the value of the
residence; (2) requires no payment of principal or interest
until the entire loan becomes due; and (3) is made by a lender
licensed and chartered pursuant to state or federal law. (Civ.
Code Sec. 1923.) A loan is due when: (1) the residence securing
the loan is sold or transferred; (2) all borrowers stop
occupying the dwelling as a principal residence, as specified;
(3) a fixed maturity date occurs; or (4) an event specified in
the loan documents occurs, which jeopardizes the lender's
security. (Civ. Code Sec. 1923.2(f).)
Existing federal regulations , the Truth in Lending Act, requires
all lenders who offer reverse mortgages to make specified
disclosures to a borrower before the closing of the transaction
that include a "good-faith projection of the total cost of the
credit," including costs and advances to a borrower (accounting
for any annuities sold as part of the transaction) and
projections of the total cost of the transaction based on
different appreciation rates and loan periods. (12 C.F.R. Secs.
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226.31, 226.33.)
Existing federal regulations also establish that a borrower may
rescind a reverse mortgage contract within three days of
executing the contract. (12 C.F.R. Sec. 226.15.) This right of
rescission does not apply, however, to a reverse mortgage that
is used to purchase a residence. (12 C.F.R. Sec. 226.15(f).)
Existing federal law places additional restrictions on reverse
mortgages that are federally insured. A reverse mortgage may
only be federally insured if it is provided to mortgagors who:
(1) are at least 62 years of age; (2) have received adequate
counseling by a third party; and (3) have received full
disclosure of all costs. (12 U.S.C.S. Sec. 1715z-20(d)(2).)
For the third-party counseling requirement, a mortgagee must
provide a list of contact information for reverse mortgage
counselors who are approved by the Secretary of the Department
of Housing and Urban Development at the time of the mortgage
application. (12 U.S.C.S. Sec. 1715z-20(f).)
Existing state law requires a lender to provide a statement to a
prospective borrower before accepting a reverse mortgage loan
application, advising the borrower in 16-point type, among other
things, that: (1) it is important to understand the terms of the
reverse mortgage; and (2) that the borrower is required to
consult with an independent loan counselor. (Civ. Code Sec.
1923.5.)
Existing state law requires a lender to provide a borrower with
a list of not fewer than 10 United States Department of Housing
and Urban Development approved counseling agencies prior to
accepting a final and complete application for a reverse
mortgage. (Civ. Code Sec. 1923.2(j).)
Existing state law prohibits a lender from accepting a final and
complete application for a reverse mortgage loan from a
prospective applicant, or assessing any fees, without receiving
a certification from an applicant or their representative that
the applicant received counseling, as specified. (Civ. Code
Sec. 1923.2(k).)
This bill would require reverse mortgage counseling to be
conducted in person, unless the certification specifies that the
applicant elected to receive counseling in a manner other than
in person.
COMMENT
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1. Stated need for the bill
According to the author:
Telephone counseling is inadequate, for prospective reverse
mortgage borrowers, because it does not take into
consideration the special circumstances that may prevent a
senior from accurately understanding the complexities of a
reverse mortgage loan.
When dealing with cases where there are other parties
involved, such as spouses of potential borrowers who are
also on title, telephone counseling does not ensure that all
parties are present and fully understand the subject matter.
The need for in person counseling allows seniors to get the
full scope of what comes with a reverse mortgage. Seniors
need to understand that should they have to move out of
their home for example to a nursing home, the requirement to
repay the loan goes into effect immediately. The issue may
arise that a senior may end �up] in a nursing home. While
loans that allow seniors to tap into their home's equity to
improve their later-years' lifestyle, they could prove to be
difficult if they must move into a nursing home, even if
only on a short-term basis.
There are many specific issues that need to be discussed
during the counseling session �and] seniors may not
understand the severity �of potential issues] over the
phone.
By mandating in-person counseling sessions, this bill will
help seniors with hearing or cognitive impairments that may
be exacerbated over the telephone.
2. In-person counseling
Under existing law, a lender may not accept a final application
for a reverse mortgage without first receiving certification
that the applicant has received counseling. That counseling
must be from a counseling agency approved by the United States
Department of Housing and Urban Development (HUD) to engage in
reverse mortgage counseling. That agency must not receive any
compensation from the lender or other person involved in
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originating or serving the mortgage or from the sale of a
financial or insurance product. This bill would strengthen the
existing counseling requirement by additionally requiring the
counseling to be conducted in person, unless the certification
specifies that the applicant elected to receive counseling in a
manner other than in person.
The California Commission on Aging, in support, notes that
"�w]hile current requirements for reverse mortgage counseling
may meet some individuals' needs, the option of requesting
in-person counseling makes it possible for older adults with
hearing impairments or both married partners to get information
first-hand." Staff further notes that the ability to conduct
face-to-face counseling in consistent with the recommendations
contained in HUD's Handbook #7610.1, 2010:
HUD recommends potential reverse mortgage borrowers,
particularly �Home Equity Conversion Mortgage Program]
borrowers, meet face-to-face with a counselor and lender to
discuss their unique financial circumstances and decide what
options are best for them. Face-to-face counseling enables
the counselor to assess whether the client understands the
alternative features and reverse mortgage options and the
financial implications of a reverse mortgage on his/her
household. All reverse mortgage counselors must have the
capacity to conduct face-to-face counseling with prospective
reverse mortgage borrowers. Counselors must advise potential
clients that they have a choice to have a face-to-face or
counseling through another mutually agreed upon format such
telephone counseling. This choice should be documented in
the client's case file. Additionally, counselors may provide
home visits for those clients who cannot get to the
participating agency's office. (Id. at pp. 30-31.)
That HUD handbook does recognize that "many seniors prefer
telephone counseling to face-to-face counseling for a variety of
reasons, including limited mobility and health conditions�, and
that] HUD allows participating agencies to provide telephone
reverse mortgage counseling only if the agency has indicated
that it will provide this as a service option within its HUD
approved housing counseling work plan." As a result, while it
is unclear whether this bill's requirements will change a
senior's general preference for telephone counseling, this bill
would facilitate that face-to-face counseling when so desired by
the individual.
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Support : AARP; California Advocates for Nursing Home Reform;
California Commission on Aging; Contra Costa Advisory Council on
Aging; National Reverse Mortgage Lenders Association
Opposition : None Known
HISTORY
Source : California Senior Legislature
Related Pending Legislation : None Known
Prior Legislation : AB 329 (Feuer, Chapter 236, Statutes of
2009) strengthened existing counseling and cross-selling
provisions and required lenders to provide the borrower with a
checklist prior to counseling that highlights the risks and
alternatives to reverse mortgages.
Prior Vote :
Assembly Banking & Finance Committee (Ayes 11, Noes 0)
Assembly Floor (Ayes 63, Noes 10)
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