BILL ANALYSIS
SB 1609
Page 1
Date of Hearing: June 13, 1006
ASSEMBLY COMMITTEE ON JUDICIARY
Dave Jones, Chair
SB 1609 (Simitian) - As Amended: June 8, 2006
SENATE VOTE : 21-15
SUBJECT : REVERSE MORTGAGES
KEY ISSUE : SHOULD CONSUMER RIGHTS BE PROTECTED, WHEN APPLYING
FOR A REVERSE MORTGAGE LOAN, BY REQUIRING THEM TO RECEIVE
INDEPENDENT COUNSELING AND A CONTRACT TRANSLATED IN THEIR
PRIMARY LANGUAGE, WHEN APPROPRIATE?
SYNOPSIS
This bill prohibits a reverse mortgage lender from accepting a
reverse mortgage application until the lender has received a
certification from the potential borrower that the borrower
received independent counseling regarding the reverse mortgage.
The bill also prohibits reverse mortgage lenders from requiring
an applicant to purchase an annuity, and requires the lender to
translate the reverse mortgage contract into the borrower's
primary language. The author states that reverse mortgage loans
are complex and expensive, and are offered mainly to the
elderly. According to the author, these factors make reverse
mortgages ripe for financial fraud and abuse against seniors.
The author also explains that such factors have also created a
breeding ground for lenders and brokers that prey on non-English
speaking California residents. Supporters, including the
American Association of Retired Persons, Consumer Attorneys of
California and Consumers Union, state that it is important to
place some reasonable limitations on the sale of annuities in
connection with a reverse mortgage, and to ensure that those
considering a reverse mortgage are well informed of the options
and consequences before making a decision on a reverse mortgage.
This bill has no opposition.
SUMMARY : Seeks to require a reverse mortgage lender to refer
potential borrowers to independent counseling and to provide a
translated reverse mortgage contract, when appropriate.
Specifically, this bill :
1)Requires a lender to refer a prospective borrower to a housing
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counseling agency approved by the United States Department of
Housing and Urban Development before accepting a reverse
mortgage application. The counseling referral is for the
purpose of discussing the advisability of a particular loan
and the appropriateness of that loan for the prospective
borrower. The lender cannot accept the reverse mortgage
application until it first receives a certification from the
borrower stating that the borrower received the described
counseling.
2)Prohibits a lender from requiring an applicant for a reverse
mortgage to purchase an annuity as a condition of obtaining a
reverse mortgage and prohibits any person from selling an
annuity to a reverse mortgage borrower 30 days after the
closing of the reverse mortgage loan if that person knew or
should have known about the existence and closing date of the
reverse mortgage loan.
3)Requires a reverse mortgage contract be translated into the
appropriate language when negotiations for the reverse
mortgage contract were conducted in another language.
EXISTING LAW :
1)Defines a reverse mortgage as a non-recourse loan secured by a
borrower's owner-occupied principal residence which: (1)
provides cash advances based on the value in 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. (Civil Code
section 1923.) Stipulates that a reverse mortgage 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, whish jeopardizes the lender's security. (Civil Code
section 1923.2(f).)
2)Requires a lender to provide a statement to a prospective
borrower before accepting a reverse mortgage loan application,
advising the borrower of his or her rights. (Civil Code
section 1923.5.)
3)Establishes that an individual annuity contract issued to a
senior citizen, 60 years old or older, may be cancelled for a
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full refund within 30 days. (Insurance Code section
10127.10.)
4)Requires certain listed contracts be translated when
negotiations for the contract were conducted in another
language. (Civil Code section 1632.)
5)Stipulates that 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. 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. sections
1715z-20(d)(2).)
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
COMMENTS : This bill prohibits a reverse mortgage lender from
accepting a reverse mortgage application until the lender has
received a certification from the potential borrower that the
borrower received independent counseling regarding the reverse
mortgage. This bill also prohibits reverse mortgage lenders
from requiring an applicant to purchase an annuity and requires
the lender to translate the reverse mortgage contract into
Spanish, Chinese, Tagalog, Vietnamese or Korean if the contract
was primarily negotiated in one of those languages. The author
states that this bill provides more safeguards that are needed
to ensure that borrowers of reverse mortgages are protected and
fully informed of the terms of the transaction. The author
states that reverse mortgage loans are very complex and
expensive loans that are offered mainly to the elderly.
According to the Center for Responsible Lending, these reverse
mortgage loans, "are targeted at an elderly population that may
be less equipped to understand all of the nuance and
complexities of the transactions." According to the author,
these factors make reverse mortgages ripe for financial fraud
and abuse against seniors. The author also explains that such
factors have also created a breeding ground for lenders and
brokers that prey on non-English speaking California residents.
Reverse Mortgages . A reverse mortgage is a type of loan which
allows homeowners to borrow against the equity in their home in
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order to access funds. The amount loaned, plus potentially
significant interest, becomes due when the person dies and/or
the house is sold. These mortgages are primarily marketed to
the elderly. These loans are called reverse mortgages because
the lender makes monthly payments to the borrower and, when the
home is either sold, or the borrower dies, the funds from the
sales go to the lender, to pay the debt.
Limitations on the Purchase of Annuities . An annuity is
insurance financed out of a home's equity that provides monthly
payments to the borrower. This bill prohibits reverse mortgage
lenders from requiring an applicant to purchase an annuity and
prohibits any person from selling an annuity to a reverse
mortgage borrower 30 days after the closing of the reverse
mortgage loan if that person knew or should have known about the
existence and closing date of the reverse mortgage loan. This
bill seeks to address the frequency with which annuities are
offered, and even required, as a part of reverse mortgage
transactions.
Consumers Union explains that a senior may already be able to
obtain monthly payments through a reverse mortgage transaction,
without the additional transaction costs of purchasing an
annuity. Consumers Union also argues that the purchase of the
annuity may damage seniors and erase the benefits of a reverse
mortgage transaction by tying up the money from the reverse
mortgage transaction for an extended period of time in an
annuity. Such annuities have substantial penalties on any
withdrawal prior to the annuity's maturity date.
The Insurance Commissioner argues that this separation will
provide a buffer from the aggressive marketing of annuities in
connection with reverse mortgages and against attempts to sell
unnecessary annuities. The Commissioner further argues that
this provision is necessary in order to prevent the illusion
that the annuity purchase is a necessary or beneficial part of
the reverse mortgage transaction.
Required Translation of Reverse Mortgage Loan Contracts . This
bill adds reverse mortgage contracts to a list of contracts
currently subject to Section 1632 of the Civil Code, which
requires a written contract to be provided in Spanish, Tagalog,
Chinese, Korean, or Vietnamese if the language of the contract
was primarily negotiated in one of those languages. The author
states that this requirement is necessary to combat the
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potential for fraud when contract negotiations are conducted in
one language but the final contract is drafted in English.
REGISTERED SUPPORT / OPPOSITION :
Support
Advisory Council of Area 4 Agency on Aging
American Association of Retired Persons, California
California Advocates for Nursing Home Reform
California Alliance for Retired Americans
California Association of Community Organizations for Reform Now
California Association of Mortgage Brokers
California Reinvestment Coalition
California Senior Legislature
California Seniors Coalition
Center for Responsible Lending
City of Oakland
Community Housing Development Corporation of North Richmond
Community Legal Services in East Palo Alto
Congress of California Seniors
Consumer Action
Consumer Attorneys of California
Consumer Federation of California
Consumers Union
Contra Costa Advisory on Aging
Fair Housing Law Project
Fair Housing of Marin
Fair Housing of Sonoma County
Gray Panthers
Housing Rights, Inc.
Insurance Commissioner John Garamendi
Project Sentinel
Public Advocates, Inc
Public Interest Law Firm
San Francisco District Attorney's Office
Triple-A Council of California
Trusts and Estates Law Section of the State Bar of California
Six individuals
Opposition
None on file.
Analysis Prepared by : Manuel Valencia / JUD. / (916) 319-2334
SB 1609
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