California Teeters As Legislators Fiddle

Sunday, 01 November 2009 00:00

Articles - Legal Updates

User Rating: / 0
PoorBest 

California Adopts The Reverse Mortgage Elder Protection Act Of 2009

With the California Legislature and Governor Schwarzenegger dawdling over the worst budget crisis in California history, one wonders how these esteemed and wizened officials could possibly find the time to devote to new legislation further regulating the offering of reverse mortgages in the nation’s most populous state. Of course, and not with standing that the State’s budgetary woes are far from over, they did. On October 11, 2009, Governor Schwarzenegger signed AB 329 into law, otherwise known as the Reverse Mortgage Elder Protection Act of 2009. The title of the legislation (suggesting that reverse mortgages are something elders need to be protected from) seems illustrative of a nationwide summer of discontent swirling over reverse mortgages. This malaise manifested itself in media reports and statements from regulators and watchdog groups concerning the inappropriate marketing of reverse mortgages and hyperbolic warnings about the sub-prime-like risks they pose. Predictably, and without much focus on accurately assessing the true scope of perceived abuses, state legislatures, are now rushing in - with all of the haste of the proverbial fool, where angels fear to tread. In this regard, California is not unique; during the past year it appears that 17 other states have entertained legislative proposals to regulate reverse mortgages. As a bellwether, California, and its legislation, is often reflective of emerging nationwide trends and, for this reason, we believe it may be illuminating to share with you the state of reverse mortgage law in the Golden State. So grab your earthquake readiness kit (and prepare to dodge pesky elected officials seeking your loose change), as we explore the latest and greatest from Sacramento.
 
Pre-Existing California Law
 
The Reverse Mortgage Elder Protection Act of 2009 (AB 329) revises and supplements existing California law embodied in California Civil Code Sections 1923-1923.10. Pre-existing law defines a reverse mortgage (in an unremarkable manner), and, among other things (i) prohibits an originator/lender from referring a borrower to anyone for the purchase of an annuity, (ii) requires that an applicant be provided with a specific disclosure warning that a reverse mortgage is a complex financial transaction and recommending the applicant seek financial counseling, and (iii) mandates that an originator/ lender refer a prospective borrower to a housing counseling agency prior to accepting a final and complete application for a reverse mortgage or charging any fees. Each of these consumer protections were noteworthy at the time they were enacted and have since been emulated in other jurisdictions. With the enactment of AB 329, which becomes effective on January 1, 2010, California has upped the ante, promulgating additional consumer safeguards that could in turn influence legislation in other jurisdictions.
 
Cross-Sell Prohibition
 
With language eerily similar to the Home Equity Conversion Mortgage (HECM) cross-sell ban found in the Housing and Economic Recovery Act of 2008 (HERA), AB 329 prohibits a lender, or any other person who participates in the origination of a reverse mortgage, from 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 procedural safeguards designed to ensure that individuals participating in the origination of the reverse mortgage have no involvement with, or incentive to provide the prospective borrower with any other financial or insurance product. Given the similarity in language with HERA, it is not surprising to find that the new California law incorporates a safe harbor for parties who comply with HERA’s HECM cross-sell provisions (paragraph (1) of the subsection (n), and with subsection (o) of Section 1715z-20 of Title 12 of the United States Code) and any regulations and guidance promulgated by HUD under that section. Of course, the HECM cross-sell provisions apply exclusively to HECM loans. At its essence, California’s cross-sell prohibition essentially extends the HECM cross-sell rule to all reverse mortgages originated in California. In addition to this “safe harbor,” the AB 329 helpfully clarifies that the cross-sell prohibition does not prevent a lender from offering or referring borrowers for title insurance,
hazard, flood or other peril insurance, or other similar products that are customary and normal under a reverse mortgage loan.
 
Counseling
In enacting the new law, California legislators were clearly concerned with the independence and integrity of the counseling process, mirroring some of the same concerns federal legislators expressed and incorporated into HERA. Notably, a counseling agency may not receive any compensation, directly or indirectly, from a lender or any other person or entity involved in originating or servicing a reverse mortgage, the sale of annuities, investments, long-term care insurance, or any other type of financial or insurance product. However, AB 329 does not prohibit financial assistance to a nonprofit counseling agency unrelated to the offering or selling of reverse mortgages which is provided by the lender/originator as part of its charitable or philanthropic giving program.
 
In addition to the ban on lender compensation for counselors, AB 329 requires lenders to provide applicants two different lists. The first is a list of no fewer than ten (10) HUD-approved nonprofit counseling agencies in California approved by HUD to engage in reverse mortgage counseling. This list of counselors must be provided to the applicant prior to accepting the final and complete loan application.
 
The second list, which may be the most significant new development heralded by AB 329, requires lenders/originators to provide the applicant with a checklist specifying material issues the borrower should be discussing with a reverse mortgage counselor. The items listed in the written checklist must be in 12-point or larger type, and are stated verbatim from the legislation below:
 
(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.
 
(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 depleted.
 
In cases where the prospective borrower seeks counseling prior to requesting a reverse mortgage loan application, AB 329 requires that the housing agency counselor provide the prospective borrower with the checklist. The checklist must 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 counseling certificate. The loan application cannot be approved until the signed checklist is provided to the lender. A copy of the checklist (assumedly, the executed copy) must be provided to the borrower.
 
In reviewing these topics, it is frankly hard to find fault with any of them. They are clearly among the major issues reverse mortgage borrowers should be considering before they determine that a reverse mortgage is suitable for their circumstances. However, what may be more interesting about the checklist is the California legislature’s choice, in its infinite wisdom, to direct efforts toward educating seniors on what counseling should cover, rather than mandating that counselors themselves cover such issues. This approach may reflect two concerns. Firstly, a lack of confidence in the quality and integrity of the counseling process (hence the need to educate consumers about what should be covered and reminding their counselors to do so), and secondly, a reluctance to get into the business of directly regulating HUD-approved counselors, perhaps underlining the unfunded nature of its mandate to use the federal network for non-FHA and non-VA loans. In any event, and even though the avalanche of documents already required to originate reverse mortgages is overly burdensome on seniors, the addition of this checklist seems to be an exercise of some restraint by the California legislature.
 
Plain Language Notice
 
AB 329 also amended the wording of the plain statement notice required under pre-existing law and additionally precludes a reverse mortgage application from being taken by a lender/originator unless the loan applicant has received the plain language statement, prior to receiving counseling. Unfortunately, it appears the California legislature has delved a little too far into the weeds on this one. The problem, of course, is the statutory requirement that the plain language notice be given by the lender/originator prior to counseling. In the case of seniors who provide a preliminary application to a lender/originator before receiving counseling, which is the more typical occurrence, there is no problem. The lender/originator can provide the plain statement notice upon first contact with the prospective applicant. However, what happens if the prospective applicant receives counseling before visiting an originator/lender? Unlike the checklist of counseling topics, there is no provision under the new California law that requires counselors to provide the plain language statement directly to the senior.
 
Finally, if you felt the prior plain language notice sounded ominous, you may want to shield your eyes from the wording of the new notice, provided below:
 
IMPORTANT NOTICE TO REVERSE MORTGAGE 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 PRUCHASE 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.
 
While the legislature’s intentions are undoubtedly noble, we modestly suggest that this type of alarmist notice may do more harm than good. To the extent it undeservedly scares away far more seniors who would clearly benefit from a reverse mortgage than it deservedly scares away from transactions that are clearly exploitive, the welfare of seniors, as a whole, are diminished. This is particularly true within the context of the reverse mortgage industry, as exemplified by the far-sighted vision of the National Reverse Mortgage Lenders Association, which has always embraced and promoted independent counseling for seniors.
 
Conclusion:
We started this article with our marvel at the incredible agility of the California Legislature in further regulating reverse mortgages while teetering on the brink of bankruptcy. The allusion to Nero fiddling as Rome burns may be exaggerated, but California’s recent legislative session can’t be the first time leaders have embraced the self-righteousness of a good distraction. Notwithstanding that so much legislative skill might have been better directed toward far bigger issues, with the discipline to address them more thoroughly, we accept the legislature’s preamble that, “in enacting the Reverse Mortgage Elder Protection Act of 2009, it is not the intent of the Legislature to discourage the use of reverse mortgages, which often provide substantial benefits to senior citizens.” In particular, we believe the new counseling checklist emphasizes the right issues in the right way - by educating and informing seniors through independent counseling. Efforts that promote the independence and integrity of the counseling process can’t be anything but a positive development for seniors and the industry. When all is said and done, and with the few reservations noted above, we have come to praise Caesar (and the California legislature), not to bury him.
 
This article provides only an overview of some of the federal and state laws and regulations that may affect reverse mortgage lending, marketing and finance matters. Although the practice of Weiner Brodsky Sidman Kider P.C. is national in scope, attorneys within our firm do not actively practice law in all jurisdictions, and these materials are not intended to and do not provide legal advice. Because of the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
 
By Joel Schiffman and Fed Kamensky, of the law firm of Weiner Brodsky Sidman Kider, P.C. The law firm serves as General Counsel to the National Reverse Mortgage Lenders Association and advisor to reverse mortgage lenders and industry participants throughout the nation. The firm has offices in Washington, D.C., Newport Beach and Dallas. Additional information can be found at www.wbsk.com or by telephone at 202.628.2000. Messrs. Schiffman and Kamensky can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and This e-mail address is being protected from spambots. You need JavaScript enabled to view it .