BILL ANALYSIS �
AB 1700
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1700 (Medina)
As Amended August 7, 2014
Majority vote
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|ASSEMBLY: |73-1 |(April 24, |SENATE: |35-0 |(August 13, |
| | |2014) | | |2013) |
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Original Committee Reference: B. & F.
SUMMARY : Prohibits a reverse mortgage lender from accepting a
reverse mortgage application until seven days have passed from
the date of mandatory loan counseling. Specifically, this bill
deletes the current requirement that the lender provides the
borrower with a specific checklist prior to counseling, and
instead provides a reverse mortgage worksheet guide in at least
14-point font.
The Senate amendments make technical changes to clarify terms
and intent.
EXISTING LAW :
1)Requires a reverse mortgage to comply with the following
requirements (Civil Code Section 1923.2):
a) Prepayment, without penalty, must be allowed at any
time;
b) The reverse mortgage may become payable and due under
certain circumstances;
c) The lender must prominently disclose in the loan
agreement any interest rate or other fees to be charged
during the period that commences on the date that the
reverse mortgage loan becomes due;
d) A lender or any other person that participates in the
origination of the mortgage shall not require the applicant
to also purchase an annuity;
e) Prohibits the lender from participating in, or be
associated with any other financial or insurance activity,
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unless the lender maintains procedural safeguards that
ensure that the originator of the reverse mortgage has no
involvement, or incentive to provide the borrower with any
other financial or insurance product;
f) Prohibits the lender from referring the borrower to
anyone for purchase of annuity or other financial product;
g) The lender must provide a prospective borrower with a
list of not fewer than 10 United States Department of
Housing and Urban Development (HUD) certified counseling
agencies; and,
h) Provides that the lender shall not accept a final and
complete application for a reverse mortgage from the
prospective applicant unless they first receive from the
applicant certification that they have received counseling
from a HUD certified counseling agency.
2)No reverse mortgage loan application shall be taken by a
lender unless the loan applicant, prior to receiving
counseling, has received from the lender the following plain
language statement in conspicuous 16-point type or larger
font, advising the prospective borrower about counseling prior
to obtaining the reverse mortgage loan:
IMPORTANT NOTICE TO REVERSE MORTGAGE LOAN APPLICANT
A REVERSE MORTGAGE IS A COMPLEX FINANCIAL TRANSACTION. IF YOU
DECIDE TO OBTAIN A REVERSE MORTGAGE LOAN, YOU WILL SIGN
BINDING LEGAL DOCUMENTS THAT WILL HAVE IMPORTANT LEGAL AND
FINANCIAL IMPLICATIONS FOR YOU AND YOUR ESTATE. IT IS
THEREFORE IMPORTANT TO UNDERSTAND THE TERMS OF THE REVERSE
MORTGAGE AND ITS EFFECT. BEFORE ENTERING INTO THIS
TRANSACTION, YOU ARE REQUIRED TO CONSULT WITH AN INDEPENDENT
LOAN COUNSELOR. A LIST OF APPROVED COUNSELORS WILL BE
PROVIDED TO YOU BY THE LENDER. SENIOR CITIZEN ADVOCACY GROUPS
ADVISE AGAINST USING THE PROCEEDS OF A REVERSE MORTGAGE TO
PURCHASE AN ANNUITY OR RELATED FINANCIAL PRODUCTS. IF YOU ARE
CONSIDERING USING YOUR PROCEEDS FOR THIS PURPOSE, YOU SHOULD
DISCUSS THE FINANCIAL IMPLICATIONS OF DOING SO WITH YOUR
COUNSELOR AND FAMILY MEMBERS.
3)Pursuant to Civil Code Section 1923.5 no reverse mortgage loan
application shall be taken by a lender unless the lender
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provides the prospective borrower, prior to his or her meeting
with a counseling agency on reverse mortgages, with a written
checklist, or in the event that the prospective borrower seeks
counseling prior to requesting a reverse mortgage loan
application from the reverse mortgage lender, the counseling
agency shall provide the prospective borrower with a written
checklist. The written checklist shall conspicuously alert
the prospective borrower, in 12-point font or larger, that he
or she should discuss with the agency counselor the following
issues:
a) How unexpected medical or other events that cause the
prospective borrower to move out of the home, either
permanently or for more than one year, earlier than
anticipated will impact the total annual loan cost of the
mortgage;
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 the loan on non-borrowing
residents of the home 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 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 registry, after the borrower's equity is
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depleted.
4)The checklist required in 1) above, shall be signed by the
agency counselor, if the counseling is done in person, and by
the prospective borrower and returned to the lender along with
the certification of counseling required under Civil Code
Section 1923.2(k), and the loan application shall not be
approved until the signed checklist is provided to the lender.
A copy of the checklist shall be provided to the borrower.
FISCAL EFFECT : None
COMMENTS : The key component of this bill are the requirements
that a borrower must wait seven days from the day of counseling
prior to turning in a final reverse mortgage loan application,
and that the lender must provide the borrower with a reverse
mortgage worksheet guide that is designed to address the various
responsibilities and consequences of a reverse mortgage. The
justification for this seven day cooling off period is to give
time to the potential borrower to consider the issues that are
discussed during counseling and highlighted in the worksheet
prior to entering into the complexities of a reverse mortgage.
The vast majority of reverse mortgages are insured by the
Federal Housing Administration (FHA) as part of its Home Equity
Conversion Mortgage (HECM) program. The FHA insurance
guarantees that borrowers will be able to access their
authorized loan funds in the future (subject to the terms of the
loan), even if the loan balance exceeds the value of the home or
if the lender experiences financial difficulty. Lenders are
guaranteed that they will be repaid in full when the home is
sold, regardless of the loan balance or home value at repayment.
Borrowers or their estates are not liable for loan balances
that exceed the value of the home at repayment - FHA insurance
covers this risk.
Today, the market for reverse mortgages is very small. Only
about 2% to 3% of eligible homeowners choose to take out a
reverse mortgage. Only about 582,000 HECM loans are outstanding
as of November 2011, as compared to more than 50 million
traditional mortgages and more than 17 million home equity loans
and lines of credit. But reverse mortgages have the potential
to become a much more prominent part of the financial landscape
in the coming decades. In 2008, the first baby boomers became
eligible for reverse mortgages. The baby boom generation (48-
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to 66-year-olds in 2012) includes more than 43 million
households, of which about 32 million are homeowners. As of
2009, the median home equity for baby boomer households was
$108,000. Many boomers may find that they will need to use
their home equity in order to maintain the lifestyle they expect
to have in retirement.
Many of the original product design concepts for the HECM
program were developed during the 1980s by private companies
offering proprietary (non-government insured) reverse mortgages
of various types. Throughout the 1990s, when the HECM program
was still a small pilot, and again in the mid-2000s, in the
midst of the housing boom, a range of proprietary products were
available in the marketplace. For most consumers, however, the
HECM offered a better value. Today, only one lender offers a
proprietary product, which accounts for only a handful of loans
per year.
The HECM program determines how much can be borrowed based on
the value of the home, prevailing interest rates, and the age of
the borrower (or youngest co-borrower). The loans require no
monthly mortgage payments. Interest and fees are added to the
principal balance each month, resulting in a rising loan balance
over time. Borrowers may remain in the home indefinitely, even
if the loan balance becomes greater than the value of the home -
so long as the borrower meets certain conditions. In return for
this protection, and protection against the possibility that
their lender fails to make loan disbursements as agreed,
borrowers pay a mortgage insurance premium (MIP) to FHA.
HECM borrowers have several options as to the structure of the
MIP, the interest rate type (fixed or adjustable), and the way
that they receive their loan proceeds. The range of options has
increased in recent years, adding to the difficulty of the
choices that prospective borrowers have to make around what is
already a complex product. Prospective borrowers are required
to attend mandatory pre-loan counseling, but the counseling may
not be sufficient to fully equip prospective borrowers to make
good decisions.
A majority of reverse mortgage borrowers report satisfaction
with the product. A 2006 AARP survey found that the product
completely met their needs (58%) or mostly met their needs
(25%). Additionally, 79% of respondents said that the reverse
mortgage helped them stay in their home, and 87% said it
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improved their quality of life. Over the last decade more
borrowers take more cash up front than in years previous. By
2008, the median borrower was taking out 88% of loan proceeds
within the first year.
Previous legislation: AB 329 (Feuer), Chapter 236, Statutes of
2009, provided that a lender or any other person that
participates in the origination of a reverse mortgage shall not
participate in, or be associated with, or employ any party that
participates in or is associated with any other financial or
insurance activity, unless the lender maintains certain
safeguards or refer prospective borrowers to anyone for purchase
of financial or insurance products.
AB 553 (Medina) of 2013, was very similar to this bill except
that it required that the potential borrower not receive
counseling until at least seven days elapsed since their contact
with the lender. AB 553 died in the Assembly Banking and
Finance Committee, pursuant to Article IV, Section 10(c) of the
California Constitution.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0004531