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AB-2408 Reverse mortgages: notifications.(2019-2020)

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Date Published: 02/18/2020 09:00 PM
AB2408:v99#DOCUMENT


CALIFORNIA LEGISLATURE— 2019–2020 REGULAR SESSION

Assembly Bill
No. 2408


Introduced by Assembly Member Grayson

February 18, 2020


An act to amend Section 1923.5 of the Civil Code, relating to reverse mortgages.


LEGISLATIVE COUNSEL'S DIGEST


AB 2408, as introduced, Grayson. Reverse mortgages: notifications.
Existing state and federal law regulate the activities of financial institutions. Existing state law regulates reverse mortgage loans and requires a lender to refer a prospective borrower to a housing counseling agency, as specified, and prohibits a lender from accepting a final and complete application for a reverse mortgage loan or assessing any fees without receiving certification, as specified, that the borrower has received loan counseling. Existing law also prohibits a lender from taking a reverse mortgage application before having provided an applicant, prior to meeting with a counseling agency, a specified disclosure notice and checklist that address various aspects of reverse mortgages.
This bill would add provisions to the reverse mortgage disclosure notice and checklist, as described above, addressing the status of a nonborrower spouse, the effect of a borrower’s death or permanent relocation from the home, and the effect of specified home improvement loans.
Vote: MAJORITY   Appropriation: NO   Fiscal Committee: NO   Local Program: NO  

The people of the State of California do enact as follows:


SECTION 1.

 Section 1923.5 of the Civil Code is amended to read:

1923.5.
 (a) 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, 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 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.
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.

(b) (1) In addition to the plain language notice described in subdivision (a), no reverse mortgage loan application shall be taken by a lender unless the lender provides the prospective borrower, prior to his or her borrower’s meeting with a counseling agency on reverse mortgages, with a reverse mortgage worksheet guide, 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 the following plain language reverse mortgage worksheet guide in 14-point type or larger:
Reverse Mortgage Worksheet Guide—Is a Reverse Mortgage Right for Me?
To decide if a recommended purchase of a reverse mortgage is right for you, consider all of your goals, needs, and available options. This self-evaluation worksheet has five essential questions for you to consider when deciding if a reverse mortgage is right for you.
Directions: The State of California advises you to carefully read and complete this worksheet, and bring it with you to your counseling session. You may make notes on a separate piece of paper with questions you may have about whether a reverse mortgage is right for you. During the counseling session, you can speak openly and confidentially with a professional reverse mortgage counselor, independent of the lender, who can help you understand what it means for you to become involved with this particular loan.
1. What happens to others in your home after you die or move out?
Rule: When the borrower dies, moves, or is absent from the home for 12 consecutive months, the loan may become due.
Considerations: Having a reverse mortgage affects the future of all those living with you. If the loan cannot be paid off, then the home will have to be sold in order to satisfy the lender. To determine if this is an issue for you, ask yourself:
(A) Who is currently living in the home with you?
(B) What will they do when you die or permanently move from the home?
(C) Have you discussed this with all those living with you or any family members?
(D) Who will pay off the loan, and have you discussed this with them?
(E) If your heirs do not have enough money to pay off the loan, the home will pass into foreclosure.
Do you need to discuss this with your counselor? Yes or No
2. Do you know that you can default on a reverse mortgage?
Rule: There are three continuous financial obligations. If you fail to keep up with your insurance, property taxes, and home maintenance, you will go into default. Uncured defaults lead to foreclosures.
Considerations: Will you have adequate resources and income to support your financial needs and obligations once you have removed all of your available equity with a reverse mortgage? To determine if this is an issue for you, ask yourself:
(A) Are you contemplating a lump-sum withdrawal?
(B) What other resources will you have once you have reached your equity withdrawal limit?
(C) Will you have funds to pay for unexpected medical expenses?
(D) Will you have the ability to finance alternative living accommodations, such as independent living, assisted living, or a long-term care nursing home?
(E) Will you have the ability to finance routine or catastrophic home repairs, especially if maintenance is a factor that may determine when the mortgage becomes payable?
Do you need to discuss this with your counselor? Yes or No
3. Have you fully explored other options?
Rule: Less costly options may exist.
Consideration: Reverse mortgages are compounding-interest loans, and the debt to the lender increases as time goes on. You may want to consider using less expensive alternatives or other assets you may have before you commit to a reverse mortgage. To determine if this is an issue for you, consider:
(A) Alternative financial options for seniors may include, but not be limited to, less costly home equity lines of credit, property tax deferral programs, or governmental aid programs.
(B) Other types of lending arrangements may be available and less costly. You may be able to use your home equity to secure loans from family members, friends, or would-be heirs.
Do you need to discuss this with your counselor? Yes or No
4. Are you intending to use the reverse mortgage to purchase a financial product?
Rule: Reverse mortgages are interest-accruing loans.
Considerations: Due to the high cost and increasing debt incurred by reverse mortgage borrowers, using home equity to finance investments is not suitable in most instances. To determine if this is an issue for you, consider:
(A) The cost of the reverse mortgage loan may exceed any financial gain from any product purchased.
(B) Will the financial product you are considering freeze or otherwise tie up your money?
(C) There may be high surrender fees, service charges, or undisclosed costs on the financial products purchased with the proceeds of a reverse mortgage.
(D) Has the sales agent offering the financial product discussed suitability with you?
Do you need to discuss this with your counselor? Yes or No
5. Do you know that a reverse mortgage may impact your eligibility for government assistance programs?
Rule: Income received from investments will count against individuals seeking government assistance.
Considerations: Converting your home equity into investments may create nonexempt asset statuses. To determine if this is an issue for you, consider:
(A) There are state and federal taxes on the income investments financed through home equity.
(B) If you go into a nursing home for an extended period of time, the reverse mortgage loan will become due, the home may be sold, and any proceeds from the sale of the home may make you ineligible for government benefits.
(C) If the homeowner is a Medi-Cal beneficiary, a reverse mortgage may make it difficult to transfer ownership of the home, thus resulting in Medi-Cal recovery.
Do you need to discuss this with your counselor? Yes or No
6. Do you know that if your spouse is not named on the property title, they are considered a “nonborrower spouse” who has no automatic right to remain in the property after you die or permanently move from the home?
Rule: A nonborrowing spouse has 90 days to establish a legal right to remain in the property.
(A) The nonborrowing spouse must demonstrate they were legally married at the time the loan was originated, continuously resident in the property as the primary residence, and remained married until the time of the borrower’s death.
(B) The nonborrowing spouse has to prove they have the legal authority to represent the borrower and has a legal right to get onto the title to the house.
(C) The property taxes and insurance must be current and there cannot be any liens on the property.
Do you need to discuss this with your counselor? Yes or No
7. Do you know what will happen to the property when you die or permanently relocate away from the home?
Rule: When the reverse mortgage servicer learns of your death they will begin the foreclosure proceedings.
(A) The nonborrowing spouse, heirs, and beneficiaries must have the legal authority to represent the borrower’s interests if the borrower becomes incapacitated or when the borrower dies.
(B) If your house ends up going into probate court, there are statutory costs associated with probate that are determined by the value of the property. The costs can be an excessive burden on a nonborrowing spouse who may have little or no funds available to finance a court procedure.
(C) After you die or permanently relocate away from the house, the reverse mortgage servicers will not talk to anyone who does not have the legal authority to represent you and they are not obligated to work with consumers to pay off the loan, purchase or sell the property, or qualify for the nonborrowing spouse option.
Do you need to discuss this with your counselor? Yes or No
8. Do you know what will happen to the property when you get a reverse mortgage, then later get involved with a Property Assessed Clean Energy (PACE) program home improvement loan?
Rule: A reverse mortgage borrower’s property will be subject to a lien during the term of the assessment contract and the obligation under the assessment contract may be required to be paid in full before the property owner sells or refinances the property.
(A) The county property tax bill will include the installment payment on the PACE lien.
(B) PACE financing typically carries rates of 6.5 to 8.5 percent, which is higher than the average for a home equity loan.
(C) Your property will be subject to a lien during the term of the assessment contract and the obligations under the assessment contract may be required to be paid in full before the property owner sells or refinances the property.
(D) When the property assessment is paid off, any fees or prepayment penalties must also be paid.
Do you need to discuss this with your counselor? Yes or No
(2) The reverse mortgage worksheet guide required in paragraph (1) 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 subdivision (k) of Section 1923.2, and the loan application shall not be approved until the signed reverse mortgage worksheet guide is provided to the lender. A copy of the reverse mortgage worksheet guide shall be provided to the borrower.