With the enactment of any new law, the first questions that arise surround the date that the act goes into effect and the problems that the new law creates. Unlike federal legislation, there is no HUD like agency to provide guidance or direct the implementation of California Assembly Bill (AB) 329.

In other words, do not expect the Department of Real Estate, the Department of Corporations, or lawmakers to provide any substantive guidance on AB 329.

AB 329 becomes effective on January 1, 2010 because it is classified as non-urgent. Although that allows some breathing room, there are questions that do not seem to have easy answers. Questions cover marketing, new requirements for counseling, and the applicability of AB 329 to national banks.

California Civil Code (CCC) Section (§) 1923 is the only portion of the CCC dealing exclusively with reverse mortgages. As stated in its preamble, AB 329 amends CCC § 1923.2 (embodied in AB 329, Section 3) and CCC § 1923.5 (Section 4); the remainder of CCC § 1923 is unchanged.

The preamble to AB 329 [Section 2(c)] specifically warns about “inappropriate marketing”, yet fails to address the matter directly, although two provisions may provide some insight:

• In amending the required California disclosure in CCC § 1923.5, lawmakers specifically deleted the phrase “additional income.” Should those advertising in California be more cautious about using the word “income” when describing reverse mortgage proceeds?

• Should California reverse mortgage advertisers be less concerned about describing reverse mortgage as “tax-free,” since the phrase “tax-free cash payments” appears in the preamble [Section 2(a)]?

CCC § 1923.5(a) states: “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….” The statement constitutes the new California disclosure form and can be found at the end of CCC § 1923.5(a).

In a recent RMD comment Mr. Daniel Fenton pointed out CCC §1923.5(a) seems to force counselors to advise seniors not to receive counseling until they have received the required disclosure statement from a lender; otherwise, no lender is eligible to take an application.

He also seems to question if a borrower completes counseling and later decides to engage a different lender before the counseling certificate expires, is the new lender eligible to take an application? This may indeed be the case.

Although not clear, lawmakers may have intended that the originating lender be responsible for ensuring that borrowers received the disclosure with its admonition before counseling is taken. Will a new lender be able to take an application if the borrower acknowledges a new California disclosure statement with the new lender and retakes counseling?

A troubling area is the information that counselors are expected to provide. Seven subsections of CCC § 1923.5(b)(1) list subjects and issues, potential borrowers should discuss with counselors (suitability issues) but it almost borders on the ridiculous as can be seen in just two of the subsections.

1. In Subsection (B) counselors are expected to be able to discuss “the extent to which the prospective borrower’s financial needs would be better met by options.”

a. While that may look like a good idea, discussing “the extent to which” means counselors will need to know the details of these alternatives and have enough information about the borrowers to make the determination.

b. If the counselor is located in Indiana, she/he will need to be conversant on the details of California state programs as well as those of counties and cities.

2. According to Subsection (F) counselors must present “the impact that the reverse mortgage may have on the prospective borrower’s tax obligations….”

a. This subsection seems to require counselors to be competent tax advisers in all aspects of tax, income, estate, property, etc.

b. Does this include out of state counselors knowing California state tax laws as well?

AB 329 seems to expect far too much out of counselors and counseling but this may just be the tip of the iceberg. With no system for appeals, some are very concerned that counselors could advise seniors to go against the long-term financial plans of far more qualified advisors, even to the extent of not issuing counseling certificates unless the suggestions of the counselor are followed.

How much, if any, will nationally chartered banks have to comply with any part of AB 329? If only parts, which ones? In what ways, if any, will other lenders be at a competitive disadvantage?

If passed as first proposed, AB 329 would have devastated the reverse mortgage industry in California. Due to the efforts of volunteers and NRMLA, the bill was greatly modified and as a result is far less onerous although it still has several difficulties.

James E. Veale, CPA, MBT
SVP of Tax and Government Affairs & Director of Originator Recruiting for Security One Lending

This article does not constitute legal advice or the rendering of a legal opinion. It simply introduces some aspects and questions related to California AB 329.