Yesterday, AB 1700 was approved by the Senate Judiciary committee with no amendments, and will be headed to the Senate floor for a vote most likely next week. I have attached the bill, but the Reader’s Digest version is this: the Bill will require that a borrower not sign an application until 7 days after counseling has taken place. It also requires that the borrower be provided with a Worksheet asking 5 questions and giving consequences to these questions. Please see below Bill for details.
The National Reverse Mortgage Lenders Association (NRMLA) argued over the course of several hearings and numerous emails with Assembly and Senate staff, that this Bill keeps seniors from locking in their rates, which could mean a loss of money to them, as well as putting seniors who are in Foreclosure or using a HECM for purchase at risk of not being able to close on time. But it was all for naught, as the proponents of this bill do not have an understanding of how these loans work, and unfortunately, as the Chairman of the committee pointed out , the Bill had many supporters, and only one opponent, NRMLA. The support came from the AARP; California Advocates for Nursing Home Reform; California Commission on Aging; Center for Responsible Lending; Consumer Federation of California; California Retired Teachers Association; and 23 individual letters.
Below is a full description of what transpired!
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2013-2014 Regular Session
AB 1700 (Medina)
As Amended June 10, 2014
Hearing Date: June 17, 2014
Fiscal: No
Urgency: No
THE SUBJECT
Reverse Mortgages: Notifications
DESCRIPTION
Existing law prohibits a lender from taking a reverse mortgage application without first providing an applicant with a specified disclosure and written checklist. Existing law also requires prospective borrowers to receive counseling before entering into a reverse mortgage.
This bill would make certain changes to the required disclosure, would replace the written checklist with a worksheet that must be signed by both the prospective borrower and a loan counselor, and would implement a seven-day waiting period between the date the borrower receives loan counseling and the point at which a lender may accept a final and complete application for a reverse mortgage loan.
BACKGROUND
A reverse mortgage is a loan against home equity, providing a cash advance to an older consumer and requiring no payment until a future time – usually not until the consumer dies, sells the home, or permanently moves away. The advantage of a reverse mortgage is that it allows an older consumer to convert some of his or her home equity into spendable cash while the consumer retains ownership of the home. Under a reverse mortgage loan, the loan proceeds are paid out to a consumer in a single lump payment, periodic installments, or on a line of credit basis over a number of years. At the time when the loan is due and payable, a consumer (or his or her heirs) is required to pay back all the loan advances plus interest and any other charges. In many instances this involves selling the house to pay off the reverse mortgage.
There are several different types of reverse mortgages, including those insured by the Federal Housing Administration (FHA), non-FHA insured reverse mortgages, which include an annuity, and non-FHA insured fixed rate reverse mortgages. However, all share some common features. Reverse mortgages are considered “rising debt” loans, meaning that the loan balance grows larger over time since a consumer is not obligated to pay back any principal or interest until a future date. The total amount of interest a consumer owes would therefore increase significantly over time as the interest compounds. In addition, most reverse mortgages are non-recourse loans, where a consumer’s legal obligation to pay back the loan is limited by the value of the home. Finally, most reverse mortgages are first mortgages, meaning that the home must be freed of all prior debt before a reverse mortgage may be issued.
Reverse mortgages are typically more complicated than other types of consumer loans. According to one recent article:
Used wisely, reverse mortgages enable older adults to tap the value of their homes without having to uproot themselves and sell. But experts warn retirees to tread carefully with these complicated loans. Used improperly, a reverse mortgage can leave a retiree broke and without a roof over his head. . . . Mistake No. 1 is approaching reverse mortgages like any other loan. “But there’s no question that taking out a reverse mortgage is vastly more complicated than taking out a home-equity line or a mortgage to buy a house,” says Bernard Krooks, a partner of Littman Krooks LLP in New York who specializes in elder law. . . . The main difference between a reverse mortgage and traditional mortgage is that the loan must be repaid in full when the homeowners—as listed on the deed—no longer live in the house.
Many reverse-mortgage borrowers run into trouble, pulling all the equity out of their home, using up the cash, then finding they are unable to afford insurance, taxes and upkeep for the property. Some couples have been foreclosed on when only one spouse was listed on the deed, and that person subsequently died or moved into a nursing home. . . . Experts stress that a decision to take a reverse mortgage is best made with input from financial advisers, accountants and estate-planning attorneys. “While it can be a useful part of estate planning, it’s not for everyone,” says Mr. Krooks. “It shouldn’t be done without being looked at in terms of overall financial needs.” (Lauricella, A Kinder, Gentler Reverse Mortgage (Mar. 22, 2014) Wall Street Journal <http://online.wsj.com/news/articles/ SB10001424052702304756104579449803195213332> (as of June 11, 2014).)
California law includes a number of provisions to protect consumers who seek to enter into reverse mortgages, including prohibiting lenders from taking reverse mortgage applications without first providing an applicant with certain disclosures and a written checklist, and requiring prospective borrowers to receive loan counseling before entering into a reverse mortgage. This bill would provide additional consumer protections for individuals considering taking out a reverse mortgage. Specifically, this bill would make certain changes to the disclosure that must be given to prospective borrowers, replace the written checklist lenders must provide borrowers with a worksheet that must be signed by both the prospective borrower and a loan counselor, and implement a seven-day waiting period between the date the borrower receives loan counseling and the point at which a lender may accept a final and complete application for a reverse mortgage loan.
CHANGES TO EXISTING LAW
1. Existing state law defines a “reverse mortgage” as a nonrecourse loan secured by real property 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 require 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. 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. 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. Sec. 1715z-20(f).)
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 provide that a lender shall not accept a final and complete application for a reverse mortgage loan from a prospective applicant or assess any fees until the lapse of seven days from the date the applicant received counseling.
2. Existing 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.)
This bill would modify the required statement to read as follows (changes in italics):
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 ON YOUR FUTURE NEEDS. BEFORE ENTERING INTO THIS TRANSACTION, YOU ARE REQUIRED TO CONSULT WITH AN INDEPENDENT REVERSE MORTGAGE LOAN COUNSELOR TO DISCUSS WHETHER OR NOT A REVERSE MORTGAGE IS RIGHT FOR YOU. A LIST OF APPROVED COUNSELORS WILL BE PROVIDED TO YOU BY THE LENDER.
3. Existing law provides that in addition to the statement above, no reverse mortgage loan application shall be taken by a lender unless the lender provides the prospective borrower, prior to his or her meeting with a counseling agency on reverse mortgages, with a written checklist. (Civ. Code Sec. 1923.5.)
This bill would replace the written checklist above with a worksheet guide that must be provided prior to a prospective borrower’s meeting with a counseling agency on reverse mortgages. The worksheet guide would provide information on the following five topics:
What happens to others in the home if the borrower dies or moves out;
Conditions under which a borrower can default on a reverse mortgage;
Alternatives to reverse mortgages;
The use of reverse mortgages to purchase financial products; and
The impact of reverse mortgages on eligibility for government assistance programs.
This bill would also codify certain findings related to the development and use of reverse mortgages.
COMMENT
1. Stated need for the bill
The author writes:
California has seen a growing trend of seniors being aggressively targeted and marketed to by the financial industry with reverse mortgages. According to the Consumer Attorneys of California, there are more than 110,000 active reverse mortgages in the state, and nearly ten percent of those loans are in default. On any given day, a California senior citizen could potentially: contact a lender for a reverse mortgage, have an hour long phone counseling session (without the assurance of detailed information and clarity of the loan), and sign up for an inappropriate reverse mortgage product all in the same day. The reverse mortgage sales pitches are highly sophisticated, and the advertisements are often made by celebrities that focus primarily on the positive parts of the loan. The State of California has an interest in assuring that only appropriate reverse mortgages are sold to seniors. Low wealth seniors who become involved with unsuitable reverse mortgage loans run the ultimate risk of not only losing their homes, but also becoming a financial burden to the State.
AB 1700 helps seniors evaluate whether or not a reverse mortgage is appropriate for their needs [by requiring prospective borrowers to complete] a Reverse Mortgage Worksheet Guide. The bill also places a seven day cooling off period between the time of counselling, and loan application submission, which gives seniors ample time to discuss the questions, answers, and potential outcomes of a reverse mortgage with their families. The current practice for reverse home mortgages begins with a senior contacting a reverse mortgage professional who specializes in these loans. The reverse mortgage professional clearly explains the terms and benefits and costs of each product, after which seniors are provided with a list of HUD-approved counselors to contact. Most counseling sessions take place either face-to-face or by telephone, although most are done over the phone, as they have been trained to deliver the required information either way. When the session is complete, both the counselor and senior sign a counseling certificate verifying they have fulfilled this requirement. AB 1700 provides the necessary time and safeguards needed for elderly clients who decide to proceed with these types of loans.
2. Ensuring Consumers are Fully Informed
Since 1997, the Legislature has required lenders to provide prospective borrowers with specific information and resources to help ensure that borrowers fully understand the implications of entering into reverse mortgages. Over time, the Legislature has required lenders to provide specific disclosures to consumers (AB 456 (Ducheny, Ch. 797, Stats. 1997)), has required consumers to receive specially tailored housing counseling (AB 1609 (Simitian, Ch. 202, Stats. 2006)), and has required lenders to provide borrowers with a checklist prior to counseling that highlights the risks and alternatives to reverse mortgages (AB 329 (Feuer, Ch. 236, Stats. 2009)).
This bill continues in the direction of ensuring that prospective borrowers receive the information and resources they need in order to make informed decisions about entering into reverse mortgages. Specifically, this bill would strengthen the disclosure statement currently provided to prospective borrowers, would replace the existing written checklist with a worksheet guide designed to force critical reflection on the implications of entering into a reverse mortgage, and would impose a seven day cooling-off period before a lender could accept a reverse mortgage application. According to the sponsor, the Fair Housing Council of Riverside County:
AB 1700 (Medina) protects elderly reverse mortgage borrowers in the reverse mortgage marketplace by ensuring all [prospective] applicants have: consulted with a HUD-approved reverse mortgage counselor, have discussed the items in the reverse mortgage worksheet guide, and have allowed a seven day cooling off period between the time of counseling, and the time of loan application submission. These enhanced protective measures provide the elderly client with additional time to review and discuss the numerous documents, fees, signed disclosures, and potential outcomes with their families and heirs.
Similarly, the California Commission on Aging writes:
Reverse mortgages may appear to older adults to be a reasonable solution to money problems. The reality is much different and much riskier, and many elderly enter into these loan agreements without fully understanding the potential peril. AB 1700 addresses this issue by imposing a seven-day waiting period before a lender can accept a reverse mortgage application and requiring borrowers to complete a worksheet detailing obligations and risks. Both steps will help borrowers to better understand the ramifications of the agreement they are about to undertake, potentially helping them to make the best decision for their circumstances.
Giving consumers a better understanding of the financial implications of entering into a reverse mortgage is crucial, especially in light of the rate at which these mortgages go into default. According to the AARP, “about 58,000 reverse mortgages — nearly 1 in 10 — were in default” at the end of 2012. (See Fleck, Are Reverse Mortgages Helpful or Hazardous? (April 2013) < http://www.aarp.org/money/credit-loans-debt/info-04-2013/are-reverse-mortgages-helpful.1.html> (as of June 11, 2014).) Staff notes that this rate of default is almost twice the delinquency rate for all mortgage loans (6.11 percent for mortgage loans on one-to-four-unit residential properties) and just under four times the rate that mortgages go into foreclosure (2.65 percent). (See Mortgage Bankers Association, Delinquency and Foreclosure Rates Continue to Improve <http://
www.mba.org/NewsandMedia/PressCenter/88228.htm> (as of June 11, 2014).) AB 1700 (Medina) Page 7 of 9
3. Seven Day Cooling-Off Period
This bill would also add a new seven day mandatory cooling-off period to the existing reverse mortgage regulatory scheme by prohibiting a lender from taking a reverse mortgage application or assessing any fees until seven days after the date a prospective borrower has received their loan counseling. Staff notes that this new cooling-off period would potentially allow borrowers more time to consider their suitability for a reverse mortgage and to seek help and assistance in understanding how a reverse mortgage would impact their financial well-being without feeling the pressure of a lender to immediately begin an application. Indeed, more time to seek help and reflect on the consequences of a reverse mortgage seems crucial. According to a recent report from the Consumer Financial Protection Bureau:
The costs, risks, and benefits of reverse mortgages are complex. Consumers struggle to understand the product and make good decisions about tradeoffs on two levels. First, they may have difficulty deciding between a reverse mortgage and an alternate course of action, such as downsizing, refinancing with a traditional mortgage, or using a traditional home equity loan or line of credit. Second, consumers may have difficulty assessing costs and making tradeoffs between the different types of reverse mortgage products and options in the marketplace today. (Consumer Financial Protection Bureau, Reverse Mortgages: Report to Congress (Jun. 28, 2012) < http://files.consumerfinance.gov/a/assets/documents/ 201206_cfpb_Reverse_Mortgage_Report.pdf> (as of June 11, 2014).)
However, the opposition argues that the new waiting period could be harmful to a borrower who would benefit from entering into a reverse mortgage if, for example, rapidly changing interest rates make a later application more expensive. The National Reverse Mortgage Lenders Association (NRMLA), writing in opposition, notes:
The proposed seven (7) day delay is an ill-conceived and unnecessary safeguard that could exacerbate timing issues in certain circumstances under which [reverse mortgages] are commonly used, such as when the reverse mortgage is being used to save a senior’s home from foreclosure, cover emergency medical expenses, pay for home modifications or repairs, or the purchase of a new home. . . . Furthermore, the “expected interest rate,” a key factor in determining how much money is available to a homeowner from a [reverse mortgage] may be set and locked at the time of loan application. . . . if the seven (7) day-cooling-off period was in effect, and interest rates moved upwards during the week that a loan applicant waits it out, the applicant would be penalized by receiving a lesser amount of proceeds from the [reverse mortgage.]
Further, NRMLA suggests that the seven day cooling-off period is unnecessary because the existing loan application process provides multiple opportunities for potential borrowers to stop an application to evaluate the consequences of entering into a reverse mortgage during the length of time it takes to process and underwrite an application, and observes that under the federal Truth in Lending Act a consumer has three business days after a loan has closed to rescind it and cancel the transaction. However, staff notes that during this new statutory period, unlike other potential opportunities to “cool off,” a borrower would likely be free from any pressure by a lender to enter into a reverse mortgage, would not feel compulsion to continue an application already underway, and would not yet have made any potentially non-refundable fees or payments to a lender.
4. Opposition’s remaining concerns
An opposition letter from NRMLA dated May 29, 2014, raises additional concerns regarding the accuracy of certain elements of the new required worksheet guide that borrowers must complete prior to receiving loan counseling. The author, in response, notes that recent amendments taken in the Senate Committee on Banking and Financial Institutions address the concerns raised in NRMLA’s letter. NRMLA, further argues that because federal requirements for reverse mortgages might change, “placing detailed language for the Worksheet in the state statue seems to us to be ill-advised, if it could result in a requirement under California law that lenders and/or counselors must provide consumers with information that is inconsistent with federal law.”
Additionally, NRMLA suggests that proposed changes to the law regarding the required disclosure statement may unintentionally restrict who can provide copies of the worksheet guide and disclosure statement to prospective borrowers prior to their completing an application, especially if the borrower opts to receive counseling before consulting a lender. In response, the author notes that the bill expressly allows both lenders and loan counselors to provide copies of all required disclosure documents and worksheets.
Support: AARP, Inc.; California Advocates for Nursing Home Reform; California Commission on Aging; Center for Responsible Lending; Consumer Federation of California; California Retired Teachers Association; 23 individuals
Opposition: National Reverse Mortgage Lenders Association
HISTORY
Source: Fair Housing Council of Riverside County
Related Pending Legislation: None Known
Prior Legislation:
AB 553 (Medina, 2013) was substantially similar to this bill. AB 553 died in the Assembly Committee on Banking and Finance. AB 1700 (Medina) Page 9 of 9
AB 2010 (Bonilla, Ch. 641, Stats. 2012) requires a prospective borrower to receive reverse mortgage counseling in person, unless the borrower elects to receive the counseling in another manner.
AB 793 (Eng, Ch. 223, Stats. 2011) generally prohibits an insurance broker or agent from participating in, being associated with, or employing any party that participates in or is associated with, the origination of a reverse mortgage.
SB 660 (Wolk, 2010) would have provided that a lender, broker, person, or entity that 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, and would have provided that a person or entity shall not attempt to avoid that duty. This bill died in the Assembly Committee on Banking and Finance.
AB 329 (Feuer, Ch. 236, Stats. 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.
AB 1609 (Simitian, Ch. 202, Stats, 2006) prohibits a reverse mortgage lender from accepting a reverse mortgage application or assessing any fees until the lender has received a certification from the potential borrower that the borrower received independent counseling regarding the transaction.
AB 456 (Ducheny, Ch. 797, Stats. 1997) implemented new provisions governing reverse mortgages, including requiring a loan applicant to receive a prescribed statement before entering into a reverse mortgage loan. This bill also specified that reverse mortgage loan payments are not considered income for purposes of determining eligibility and benefits under means-tested aid programs.
Prior Vote:
Senate Committee on Banking and Financial Institutions (Ayes 7, Noes 0)
Assembly Floor (Ayes 73, Noes 1)
Assembly Committee on Banking and Finance (Ayes 11, Noes 1)
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