The Reverse Mortgage Elder Protection Act of 2009

Governor Schwarzenegger has signed into law AB 329, which amends provisions of the California Civil Code currently regulating reverse mortgages, to enact the Reverse Mortgage Elder Protection Act of 2009. Reverse mortgage loans are currently regulated under existing California law. 

Among other things, existing law prohibits a lender from referring a borrower to anyone for the purchase of an annuity, requires a lender to refer a prospective borrower to a housing counseling agency for counseling, and requires a lender to provide an applicant with a reverse mortgage-specific disclosure notice.  The Reverse Mortgage Elder Protection Act of 2009 creates additional consumer protections in connection with reverse mortgage loans.

Other Products:  First, the Act adds a provision prohibiting a lender, or any other person who participates in the origination of the 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 mortgage shall have no involvement with, or incentive to provide the prospective borrower with any other financial or insurance product. 

However, a lender may offer or refer borrowers for title insurance, hazard, flood, or other peril insurance, or other similar products that are customary and normal under a reverse mortgage loan.  Additionally, a lender, or any other person who complies with the FHA HECM cross-selling provisions, shall be deemed to have complied with the cross-selling provisions of the Act.

Reverse Mortgage Counseling: The Act requires a lender to provide the prospective borrower with a list of not fewer than ten (10) HUD-approved nonprofit counseling agencies in California.  The counseling agency may not receive any compensation directly or indirectly from a lender, or any other person or entity involved in originating or servicing the mortgage or the sale of annuities, investments, long-term care insurance, or any other type of financial or insurance product.  However, the Act does not prohibit a counseling agency from receiving financial assistance that is unrelated to the offering or selling of a reverse mortgage loan, and that is provided by a lender as part of charitable or philanthropic activities.

Checklist:  Additionally, the Act requires a lender to provide the borrower with a checklist specifying issues the borrower should discuss with a reverse mortgage counselor.  For example, and among other things, the borrower must discuss how unexpected medical or other events that cause the borrower to move out of the home either permanently or for more than a year earlier than anticipated will impact the total annual loan cost of the mortgage.  If the borrower seeks counseling prior to requesting a reverse mortgage loan application, the Act requires the mortgage counselor to provide the checklist.

The checklist must be signed by the counselor (if the counseling is done in person) and the prospective borrower, with a copy provided to the borrower, and returned to the lender along with the counseling certification.  The loan application will not be considered approved until the signed checklist is provided to the lender.  Also, a copy of the checklist must be provided to the borrower.

Important Notice Reverse Mortgage Disclosure:  Finally, the Act amends the notification language of the Important Notice disclosure, and further requires that the disclosure be provided to the borrower prior to receiving counseling.

Additionally, Governor Schwarzenegger has signed AB 1160 into law, which amends provisions on mortgage negotiations conducted in certain languages other than English, including reverse mortgages. Existing California law requires a person in a trade or business who negotiates specified contracts or agreements primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean to deliver, except as otherwise specified, to the other party prior to execution of the contract or agreement, a translation of the contract or agreement in the applicable foreign language.  Failure to comply with these provisions entitles the aggrieved party to rescind the contract or agreement. Moreover, these provisions apply to specified loans or extensions of credit subject to the Industrial Loan Law and the California Finance Lenders Law.

AB 1160 requires a “supervised financial organization” that negotiates primarily in one of the aforementioned languages in the course of entering into a contract or agreement for a loan or extension of credit secured by residential real property to deliver prior to the execution of the contract or agreement, and no later than three (3) business days after receiving the written application, a specified form in the applicable foreign language summarizing the terms of the contract or agreement.  If any of the loan terms summarized materially change after provision of the translated form but prior to consummation of the loan, the supervised financial organization must provide an updated version of the translated form prior to consummation of the loan. 

A “supervised financial organization” is defined as a bank, savings association, credit union, or holding company, affiliate, or subsidiary thereof, and also includes entities licensed under the California Finance Lenders Law and California Residential Mortgage Lending Act.  However, AB 1160 does not apply to federally chartered banks, credit unions, savings banks, or thrifts.  Furthermore, the provisions of AB 1160 would not affect the obligations of a real estate broker.

Additionally, AB 1160 provides that a supervised financial organization that complies with these provisions would be deemed to be in compliance with the translation requirement in existing California law as previously described.  Moreover, AB 1160 provides that a supervised financial organization that complies with the translation requirement in existing law would be in compliance with these provisions.

Note that the requirements under AB 1160 do not apply to a supervised financial organization that negotiates primarily in a language other than English if the party with whom the supervised financial organization is negotiating negotiates the terms of the contract through his or her own interpreter.
AB 1160 provides for administrative penalties against specified licensed persons for violations of these provisions, and authorizes an action against a supervised financial organization for a violation of these provisions to be brought only by a licensing agency or by the Attorney General.  In addition, AB 1160 requires the Department of Corporations and the Department of Financial Institutions to create a new form for these purposes, and to make it available in each of the previously discussed languages.  In creating the form, the Departments may use HUD’s Good Faith Estimate disclosure form as guidance.

AB 329 becomes effective January 1, 2010.  AB 1160 would become operative beginning July 1, 2010, or 90 days after issuance of a form as provided, whichever occurs later.

Brought to you by NRMLA - National Reverse Mortgage Lenders Association