Hearing Scheduled For California Reverse Mortgage Suitability Bill

A new hearing in California is scheduled for April 29th to discuss a bill introduced by Senator Lois Wolk to establish reverse mortgage suitability standards.  Introduced in February, SB 660 would require that lenders, brokers, or others who recommend the purchase of a reverse mortgage have objective and reasonable grounds for believing that a reverse mortgage is appropriate for the perspective borrower.

The suitability of a recommended purchase of a reverse mortgage shall be determined, with reference to the totality of the particular borrower’s circumstances, goals, and needs said a statement from the California Advocates for Nursing Home Reform.

The Legislative Counsel Digest states that:

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This bill would provide that a lender, broker, person, or entity who recommends the purchase of a reverse mortgage owes the prospective borrower a duty of honesty, good faith, and fair dealing. The bill would require that a lender, broker, person, or entity that recommends the purchase of a reverse mortgage have reasonable grounds for believing that the reverse mortgage is suitable for the prospective borrower and to make reasonable inquiries to determine suitability.

The bill would require that the suitability of a recommended purchase of a reverse mortgage be determined, with reference to the totality of the particular borrower’s circumstances, goals, and needs and establishes specified criteria for the purpose of making this evaluation. The bill would provide that recommendation of the purchase of a reverse mortgage that is found to be unsuitable constitutes a breach of the duty of honesty, good faith, and fair dealing. The bill would permit any person injured as a result to bring a civil action for damages. The bill would require a lender, broker, person, or entity that recommends the purchase of a reverse mortgage to develop and maintain a system to achieve compliance with its provisions, as specified.

The text of the bill also lists 13 items which should help determine whether or not a reverse mortgage is suitable for a borrower.  You can read the list at the link below. Thank you Shannon for the info.

SB 660

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  • Suitability. It’s a word that has moved more into the lexicon of reverse mortgage lending. The problem I see with this bill is the judgement in hindsight if a loan officer exercised “objective and reasonable grounds for believing that a reverse mortgage is appropriate “.

    Ironically the judgement would be completely “subjective” and open to the interpretation of the the state or the plaintiff’s attorney. Mark my words, if this bill passes you will see TV ads in a few years asking reverse borrowers who think they were “injured” to call a toll-free number.

    Presently, current lending laws have statutes requiring the loan officer to act in “good faith” and in the best interest of the borrower.

    Once again, lawmakers may end up harming the very industry that remains to help seniors who need it the most.

    In the meantime, document WHY your client is getting the reverse and place it in your files. Fact-finding and documentation are crucial.

  • Why stop at Reverse Mortgages? This should apply to “forward” HELOC’s/Home Equity Loans, car loans, etc., if the buzzword is suitability.

    I completely understand the premise of consumer protection but there needs to be realistic expectations.

    What next? An I.Q. test?

  • I have been in the financial services business for over 30 years. Every decade or so a product comes along that is exceptionally advantageous to the public. Features and benefits that can be described as too good to be true, and yet they are true. They represent genuine financial benefits which usually take advantage of tax law or structural guarantees that support the generous financial benefit to the consumer. The HECM reverse mortgage is just such a product.

    Inevitably what happens to these products is that the government through incompetence, ignorance or fears that they will lose revenues step in and change the products structure or laws. Stripping the strongest benefits from the product and leaving marginal values as a result.

    I have said for for years that the strongest benefits of the reverse mortgage will at some point be removed or dramatically weakened. Interestingly in this case it seems it will take place because of the myopic view of the financial applications of the reverse mortgage.

    The current reverse mortgage industry suffers from the over abundance of people giving advice about its use by those who are unqualified to give the advice. I tell clients regularly that people who give you bad financial advice don’t usually do so on purpose. They just don’t know what they don’t know. Simply put advice from the ignorant does as much or more harm to people than the abuse of some unscrupulous characters selling the product. That is unfortunate!

    We live in a highly emotional, politicized world. Ignorance, greed and just plain stupidity seem more prevalent then I have seen in years. Those realities are around and woven into the discussion of this very valuable financial tool.

    Today’s most beneficial product benefits will not last. Those who are smart enough or lucky enough to take advantage of today’s product will reap the best benefits for years to come. Those who wait will, as in the past, wonder why nobody told them what they could have had.

    The California suitability proposal demonstrates the ignorance of its proponents. Once again they just don’t know what they don’t know and the consumer will be the looser.

    Legislators and would be advisors should be required to demonstrate their competence to give financial advice and specific competence in this product before being able to regulate it. But that is a different world. Oh Well. There are lots of people to help for a while longer.

  • to Dave: re: comment #4

    Well said. If the California suitability proposal, or the 30 day rescission becomes law, reverse mortgages in California will very soon become a shadow of the current market. With the “baby boomer” generation just starting to come of age, untold thousands of seniors will be denied a unique and outstanding financial planning tool.

  • This is not only a waste of time and money, but the subjective aspects of this miscreant law make it absolutely unenforceable.

    Good deal for the attorneys that write the law. Must be their reitirment that the public will be forced to pay!

  • This is just one more example of the incompetant bureaucratic bozos that is plaguing California. Will these lawmakers help seniors decide whether to take their meds, or eat, or turn on the heat? Are they more concerned with who inherits the property, or the non-owner who may have to move, or the person who “OWNS” the property? RM’s are not for everyone, but to those who need it to survive, it is a godsend. Let people decide what is best for them, not Big Brother who spends too much time looking in the mirror.

  • I first want to thank Mr. Hicks and admin for keeping us current on this crucial California legislation.

    While I support Mr. Hicks without reservation and believe in the statements he makes in his comments, I do not agree with his final paragraph: “In the meantime, document WHY your client is getting the reverse and place it in your files. Fact-finding and documentation are crucial.”

    As a CPA who can issue auditor’s and accountant’s reports, my profession is in constant litigation over “fact-finding and documentation.” Much of it stems from what was and what was not put into the audit files. What goes on during the audit as to workpapers, documentation, and fact-finding is usualy different than what ends up in the audit file. Most audit files now provide as few workpapers and documents as necessary to support the conclusions reached during the audit. In other words, do not “overdocument” and do not provide information that is unnecessary to supporting one’s conclusions.

    There are times when documentation is required or just plain needed. Just make sure that whatever you do document, you are aware of everything you used and know why you used it. Stay away from copying documents that will lead to other matters.

    When one over documents a lender file, internal files, or even personal files, sometimes things that seem innocuous or perhaps helpful at the time of origination may prove detrimental in the hands of a plaintiff years later. While there is nothing wrong with investigating the items pointed out in California Senate Bill 660, do not document how you perform such tests in one case but fail to do so in others. You could be setting yourself for a plaintiff. Many more suggestions could be made in this regard but I will stop here.

    It would be helpful if some attorneys would comment on these points.

  • Anyone notice the timing of the deletion of the bullet on the Important Terms document that allowed a life estate?
    Interesting timing as the Banks/Government removes the provision that allows a non borrower, younger spouse to remain in the property if the borrower dies. This is being done at the same time “they” are trying to put an unreasonable burden on the loan officers who are trying to help their clients to live a better, stress free (or reduced) lives.
    Based on the success of the program, this is just another way of shutting down the benefits of a program, designed for the benefit of seniors who made this country what it is! Easier on the politico’s than stopping the program, just make it too expensive for the borrowers, not enough earnings for the loan officers and then change the protections on top of that. That should kill the programs!
    Good job!

  • >>or the 30 day rescission becomes law

    A whole new market will be created if it becomes law.

    Originators will locate the homeowners who are waiting out their 30 days and ask if they can review the homeowners loan documents, to ensure they received a fair deal. If the homeowners were sold a higher margin and/or $35.00 service fee, the new Originator will offer a lower margin and service fee, resulting in the homeowner receiving more cash, sometimes significantly more cash. They’ll be upset with their current Loan Officer, recind the deal and start the loan over with the new Reverse Mortgage Originator.

    It’ll drive everybody nuts.

  • I’m optimistic that the legislators will use reason and make a good decision with regard to all of this. “Suitability” is difficult to determine and could be too restrictive (some homeowners that want the program could be denied it), and a 30 day recision period after signing final loan documents would destroy the business(homeowners are already given the note and TD at application and have plenty of time to review the terms).

  • Jim,

    Thank you for the correction and pointing out the dangers of over-documentation.

    My intent was to have some sort of written record (for recollection) of why the client wanted the HECM. I’ve made notes to this effect especially when a non-borrowing spouse is coming off title.

    How do we protect ourselves from a “he said, she said” battle in the future? I don’t know, but was hoping documenting would help. I wasn’t aware this would increase one’s exposure to lawsuits.

    If this passes, we will all need some sort of strategy to help protect us as originators in the future. I appreciate perspectives from professionals like yourself and others in the industry.

  • What happens if my senior homeowner client,thoroughly competent and wizened by many years of experience on the planet, quite possible a retired attorney or business owner simply says… “I want a reverse mortgage”. ?

    Sometimes it’s painfully obvious why the homeowner wants a RM, sometimes not. Some may consider the reason for the reverse completely frivolous. So what? Is the state of California fit to say what a senior homeowner chooses to do with their private property right or wrong?

    I’ve done RM’s for people who want to buy an RV or a vacation home. Perhaps we should establish a new commission in California. The Reverse Mortgage Applications Approval Board. A panel of blue ribbon of otherwise unemployable “senior advocates” to decide on the suitability of each reverse mortgage application in California. We should be able to get a loan done in just under a year with this process in place.

    By the way… isn’t that what the HECM counselors discuss during a counseling session? Oh yeah, they will probably be too busy now conducting a financial analysis and administering the qualifying final exam to have time to discuss issues like suitability.

    By the way, I’m interested in seeing the definition of “suitable”. If the legislature is consistent, none will appear.

  • we have brought this on ourselves. If we treat our customers like we treat our parents we won’t need these
    safe guards. I have been at many presentations and heard finacial planners talking about reverse mortgage to fund an Annuity or some other finacial plan. Or pushing a senior who does not need money but the cry from broker was the program is going away. Many seniors need a reverse mortgage for income but we have to caution not to abuse the program. How many brokers are making seniors take all the cash so thier commission goes up? We are responsable for our seniors because they look for our trust and knowledge. By not telling a youger borrower or family memmber may not end up with the family regardless of life estates or wills. The house has a loan and it has to be paid off when reverse mortgage comes due. If the familly wants to keep the home let them make loan payments to thier bank so if the value goes down they might be able to refinance. Don’t blame us brokers who are concerened to the brokers who are only in for the money. Our seniors need us. Maybe if we due our job seniors will not need 30 days to make up their mind. Stop crying and do the right thing now!!!!!!

  • Truly unbelievable, as others have stated another example of a good idea being taken to the point of absurdity by bureaucrats.
    The ‘gray areas’ that this bill attempts to define remain so abstract that much of what is proposed is not much more than an exercise chasing one’s own tail.
    The bottom line is that in determinng the ever present ‘suitability’, the broker is forced to become the government’s agent to pass judgment on what the borrower may do with the money. Up to now, a wonderful aspect of the reverse is that it’s the homeowner’s business to decide what they want to do with THEIR money. Would I have apprehensions about a client who loves to gamble coming into a lot of money…you bet. How in the world should I begin to assess whether a person should buy an in-home healthcare insurance policy or not? Once again, seniors are not stupid and for many the liquidity a reverse provides is their goal and it is not one to be met by low cost housing improvement loans or other alternative programs etc.
    This is mind blowing.

  • How about the fact that these payoffs will constantly change during the 30 day recission period. Thats great if the client wants to pay the money back, but what about the lender who was already cleared from title. Are they suppose to take the money back with no interest. Are they going to require a new payoff at the end of the 30 days? How about the banks lending the money to the borrower interest free for 30 days. Since they cant do that, and take that risk, they will eventually have to increase margins even more to make up for the loss in interest from those that do rescind and pay back the money interest free. In turn, causing the fees, and the very benefit of this loan to be lost!

  • mr reverse, you are an example of the stupid people out there.

    Exactly how many “bad” reverse mortgages have been done.

    I done know, but i bet its less then 5% of ALL the rm done since 1989.

    Like so many other have said, a senior is not a culeless, uneducated person. Stop treating them like one.

  • Mr. Hicks

    I believe documentation in the case you sight is appropriate. Attorneys may disagree, however.

    Again the issue is, is it germane to the ultimate decision? If it is not, it seems superfluous and probably should not be retained — but if it is germane (as in the case you sight), it seems appropriate to document it at least in one’s personal files.

    I have, however, wanted to add a document for signature at closing that verifies that the referral issue described in California Civil Code Section (“CCC §”) 1923.2(i)(2) has not been violated at least through date of signature. CCC § 1923.2(i) currently reads as follows:

    “(i) A lender shall not require an applicant for a reverse mortgage to purchase an annuity as a condition of obtaining a reverse mortgage loan. A reverse mortgage lender or a broker arranging a reverse mortgage loan shall not:

    (1) Offer an annuity to the borrower prior to the closing of the reverse mortgage or before the expiration of the right of the borrower to rescind the reverse mortgage agreement.

    (2) Refer the borrower to anyone for the purchase of an annuity prior to the closing of the reverse mortgage or before the expiration of the right of the borrower to rescind the reverse mortgage agreement.”

  • Mr Veale brings up some excellent points.

    I hope we can get some clarification from HUD or NRMLA on this issue should we face potential suitability issues in the future.

    Perhaps this would be a good area to cover in the new NRMLA CRMP designation?

  • I read SB660. Some of the provisions are truly troubling.

    Sec 1923.1.(b) to read “The suitability of a recommended purchase of a reverse mortgage shall be determined, with reference to the totality of the particular borrower’s circumstances, goals, and needs, including, but not limited to, the following:” etc. and so forth. . . .

    The question is “Who determines the suitability?”
    In looking to what follows as part of that determination, some of the items are crystal ball gazing — as in (6) The borrower’s . . . probability for living independently into the foreseeable future.

    I am not a social worker (3) . . . (alternatives [which] may include, but are not limited to, low-cost housing rehabilitation grants and public loans, tax postponement, or government aid programs); a CFP,CPA,attorney or licensed stockbroker (4) (a determination of whether the cost of obtaining the reverse mortgage outweighs the anticipated earning from the investment; an elder care attorney (5) (proceeds . . . to purchase a long-term insurance product, an evaluation if that product is appropriate for the homowner).

    I am a reverse mortgage loan originator. I do my due diligence as a loan originator. I work with seniors to get the loans they need. Reverse mortgages are LOANS, and that is all they are, even as uniquely as they are designed. If the legislature thinks seniors are being ripped off, they should hear some of the stories I hear about regular mortgages that the seniors really did not need but took out when they did not understand what the ultimate payments would be at reset. Why aren’t those loans to seniors being restricted by these provisions? Oh, sorry! That would be closing the barn door after . . . .

    The provision that really gets me is the that under the above proposed law that I am not licensed or gifted to provide (crystal ball gazing is an art after all), “any person injured as a result of the [said] breach [caused by lack of crystal ball gazing ability and lack of the licenses of a CFP, CPA, attorney, social worker, or stock broker [wait, aren’t their crystal balls broken?] may bring a civil action for damages.”

    So my question again is WHO determines and I suppose WHEN do they determine the suitability of a recommended purchase of a reverse mortgage? Who will police this civil code? Will the courts? What is the statute of limitations for not being a superman with super powers to see all the legal ramifications past and future and able to see into the bodies of seniors and minds of their heirs to know who will be injured by a loan? And when does the statute of limitation begin to run? Fifty years from now when a subsequent heir decides “Oh yeah, I could have had the house if there wasn’t a reverse mortgage on it and I had to sell it.” If this does pass in current form it opens the door to heirs suing for ANY kind of loan that their parents or grandparents or aunts or uncles etc took out that could “injure” them.

  • I guess you all miss understand my point. I do not say we are all quilty but it’s obvious we have many bad apples in any industry. Maybee its not our responsablity to be a police man. But when I read and see how many annuities have been sold to a senior when he is getting a reverse mortgage annuity, why. I am saying many great reverse mortgage orginators do what is right. We advise seniors to remove a spouse or familly member to put property in a life estate which HUD never disallowed but many of us never relazied the problem in a down market.Properties were going up there was equity today properties going down no equity! This is not new we knew it years ago. Maybe because of my upbring I worry about my felow seniors. This sounds like forward mortgage people who claim the income or facts they did not want to hear but make loans.

    To Mr P in california do you really think we only have 5% loans abused. do you know we have more than 5% seniors reverse Mortgages homes have been foreclosure on? yes some have died, some have given the homes back voluntary due to decreasing values. Many have canceled their home owners insurance so did not properly budget for additional expense.
    I don’t think we have to write laws telling people what to do with thier money but when you are working with 80 and 90 100 Year old pepole who can be your own parents or grandparents. Brokers may not agree with me it’s only my opion and many of my assocaites who take pride in what we do. Nobody is asking you to agree with me you have every right to disagree I hope this is still the USA and I will call it as I see it. You can call me stupid or any names you people want.
    “If there’s smoke thier generaly is Fire”

    P.S. I have read the Calif bill can not find 30 day resesion provision can some one enlight me.

  • Mr Reverse,

    There is definitely a 30 day rescission period being floated as part of AB329:

    You can find it here on RMD’s earlier post:
    http://rmdaily.wpengine.com/2009/04/21/california-reverse-mortgage-bill-amended-new-hearing-scheduled/

    Or here on the bill’s web site:
    http://www.leginfo.ca.gov/cgi-bin/postquery?bill_number=ab_329&sess=CUR&house=B&search_type=email

    **In fact you posted on this article specifying the 30 day waiting period on April 22nd. Check it out again. It’s a sobering bill.**

    By the way, I would think that everyone posting on this article is truly concerned about seniors. What we don’t want is legislation that kills our business and hurts seniors because of a few bad apples. That concern still exists especially when we see “do-good” legislation that will ultimately “do-bad” by killing the program through ignorant regulations.

    We cannot write legislation that eliminates the possibility that a senior borrower may act irresponsibly or not keep their property taxes and insurance current.

  • Does anyone have contact info for who we can write to or call? Or will we just wait till it passes to try to do something?
    If so please pass it on, and let other originators know as well.
    Does NRMLA have a stance?
    Any suggestions from someone with experience in this would be great.
    If someone didn’t know finance or this industry, it sounds like a good thing, we know it isn’t, but we need to let everyone know it isn’t!

  • mr. reverse,

    Being a CPA, I have been trained to suppress my own feelings in what I write unless it is called for. Your two comments need someone to respond with feeling.

    I am bothered by your accusations: “we have brought this on ourselves.” And then: “I guess you all miss understand my point. I do not say we are all quilty but it’s obvious we have many bad apples in any industry.” And then again: “But when I read and see how many annuities have been sold to a senior when he is getting a reverse mortgage annuity, ….”

    How many is “many” to you? Maybe one bad apple is one too many but this is a huge accusation. Maybe I am just wearing rose colored glasses but your statement is way too sweeping. Most of the loan officers I know in this industry are trying their best to help seniors to the best of their ability. Unless you have actual numbers, please do not make such accusations.

    As to annuities, are you saying that if a reverse mortgage borrower gets an annuity that is the fault of the reverse mortgage originator? If you are talking about cross-selling, please remember that in California only those who hold insurance and/or certain securities licenses can sell them. I personally have seen no data on how many annuities have been sold to reverse mortgage borrowers and particularly regarding how many of that total were sold before the reverse mortgage was funded. Providing that information would be valuable. Again if these are subjective determinations then please say so. I hope that if you have direct knowledge about anyone violating California Civil Code Section 1923.2(i), you are reporting them to the proper California agencies.

    Your limited knowledge about reverse mortgages is fully displayed when you say: “We advise seniors to remove a spouse or familly member to put property in a life estate which HUD never disallowed but many of us never relazied the problem in a down market.” What is “the problem”? The same problem exists in an “up market.” At any time that the balance due is greater than the net available proceeds from a new reverse mortgage, and the borrower cannot provide the difference, “the problem” exists and reversing the title change may not be possible. This sometimes occurs with an increased expected interest rate where all of the available proceeds were distributed at funding and despite an increased home value. But there are several other potential problems with such actions. Please don’t try to slough your lack of doing basic homework off onto HUD. Seniors should have the right to change title. It is your job to help them understand the consequences or tell them to seek the advice of those who can.

    Did you ever consider the gift tax or estate tax consequences with your “advice?” What about undoing their estate plan? What effect will it have on heirs? Remember many husbands and wives do not share exactly the same heirs. Putting heirs on as remainder men with a spouse could force a sale of the home even though the life tenant wanted the spouse to have the right to live in it until her passing. What about the effect on probate? Do you advise borrowers to seek the advice of their attorneys and estate planners before changing title? I actually stopped a reverse mortgage where the borrowers were shifting a $5,000,000 home back to the parents because of the estimated gift and future estate tax consequences.

    Sir, your advice is your advice. It is not mine. I refuse to be associated with your “we.” Please don’t attempt to ease your own conscience at the expense of others.

  • Mr. Reverse,

    Regarding your statement, “We advise seniors to remove a spouse or family member to put property in a life estate …” Advising someone to put property in a life estate or remove property from a life estate is giving legal advice. As reverse mortgage originators we are not to give legal advice. Only attorneys should be giving such advice after their careful consideration of all the consequences including their estate plan, family, and how it will or will not affect someone on Medicaid. As an originator we should refer them to an experienced elder law attorney if they are considering changing title.

    This kind of advice is the problem with suitability determined by originators, we are not attorneys, CPA’s, or financial advisers. Giving this kind of advice is setting an originator up for a law suit – one of the reasons we don’t want originator suitability clauses in the law.

  • I did not say all originators were quilty I know many who are sincer and work hard for the seniors. but if there are many complaints so thing is wrong. True we are blamed for seniors who are scamed by a family member, or an investment person,and many members of the press who don’t understand the product we take the Blame.

    I ask a question about the 30 day recession because I read it here but did not see it in the new Goverenor Of Calif. suitability letter.
    Second I was accused of giving life estates advise with out consulting an attorney. My statement was we give advise I was generalizing. My Company always have borrowers consult an Elder care attorney to see if it makes sense.
    My question which no one adressed is how many reverse mortgage foreclosuers do we have now?

  • Once again, a foreclosure on a rm can be for many reasons.

    If the client DO NOT maitain hazard insurance, taxes, property and live in the house. Must servicing companies will work with the client to maintain these. It is when they refuse, that a foreclosure will start.

    Another type of foreclosure is when all borrower have left the house foreever. The servicing companies let the person in charge of the estate make the decision on how to pay the loan back; by selling, re-fi, or if they have the funds, just pay. Now if the person does not want to do any of the above or walks away, the servicing needs to do the legal steps of “foreclosing”.
    These are the main reason for foreclosing, and all these are in the loan docs. It shall be explain by the loan officer,counselors and by the homeowner reading and educating themselves about reverse mortgages.

    I biggest issue, is having people treat senior like little kids and they are unable to understand things. Yes, some senior minds do not fully understand, and for many reasons. In these case, family members and advisor need to be brought in to assist.

    Also, I near people say things, but never have proof about the issue. Yes some people have had senior use rm to buy annuities, but again how many were done?

    Some people used rm to buy stocks, maybe not a good idea in some eyes, but again should we stop people from using their money for their issue?

    If a grandparent wants to pay for college for only one of their grandchildren, should we stop them because it is not fair to the other grandchildren.

    Should we stop a rm client from buying a more expensive car with the money because there are cheaper cars out there?

    I can go on, but remember they are humans!

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