Banking Lobbyists Fight Reverse Mortgage Legislation

image Banks continue to lobby for support in California, spending $4.4 million lobbying state lawmakers in the first quarter of this year, just $500,000 less than the $4.9 million they spent in the first quarter of 2007 according to the Sacramento Bee.

Bank of America has increased its lobbying expenditures in California from about $24,000 in the first quarter of 2005 to about $80,000 in the first quarter of this year.  BofA spokeswoman Shirley Norton says the increase is due to the company’s greater presence and exposure to risk in California after the purchase of Countrywide Financial and Merrill Lynch.  

While BofA is trying to cut costs, Norton said, but it’s important to have a say in policy decisions at the Capitol.  "You want to have an opportunity to have your side heard," Norton said.

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Officials from the state Legislature and from competing lobbying groups say bank lobbyists have become more aggressive as public perception of their industry sours.  "They see all these various bills as nibbling away and creating the impression that banks are engaged in all this duplicity in lending behavior," said Tom Clark, counsel to the Assembly Judiciary Committee. "They’ve become more defensive."

The result this session: Some bills that started out with tough consumer protection language were rewritten after running into fire from financial industry lobbyists.  "It’s the way the process works, is everything gets kind of watered down," Clark said.

Specifically, banking lobbyists have focused their attention on two reverse mortgage bills, SB 660 and AB 329, bills that would require more disclosure for seniors taking out reverse mortgages. 

Sen. Lois Wolk, D-Davis, said she experienced heavy opposition by banks and credit unions after she introduced SB 660. In its original form, the bill would have required sellers of reverse mortgages to exercise a "fiduciary duty" to put the client’s interest first. SB 660 also would have required lenders to make a determination that the reverse mortgage was a suitable product for the customer.

As many as eight bank and credit union lobbyists crowded into an initial meeting on the legislation, recalled Craig Reynolds, Wolk’s chief of staff.  "They lobbied against it furiously," talking individually with legislators and staff, writing letters, visiting daily and nearly eliminating SB 660, Reynolds said.

Faced with such a fierce fight, Wolk rewrote her bill. It now requires simply that lenders exercise "honesty, good faith and fair dealing" when recommending reverse mortgages in anticipation of financial gain. It also requires that lenders publish cautionary language in bold type.

The other reverse mortgage bill that attracted intense interest from the banking industry was AB 329, by Assemblyman Mike Feuer, D-Los Angeles.  Like Wolk, Feuer started out requiring sellers of reverse mortgages to exercise fiduciary duty. His bill also included a 30-day grace period in which the borrower could back out.

Those elements have been removed. As it is currently written, AB 329 simply strengthens existing counseling and notification requirements for borrowers. It awaits a vote on the Senate floor.

Beth Mills, spokeswoman for the California Bankers Association, which collects membership dues from about 200 banks, said financial institutions had valid reasons to oppose SB 660 and AB 329. Mills said it would be extremely difficult to allow a 30-day back-out period for reverse mortgages, since banks often advance funds or pay off creditors before that much time has elapsed.

The initial requirement that bankers exercise fiduciary duty when selling reverse mortgages also made little sense for banks, Mills said. She said the role of banks is to sell their product. Unlike brokers, lenders aren’t paid to shop around for the best deal for the customer.

"If you went straight to a Ford dealership, the dealer is not going to show you Toyotas and Hondas, too," she said.

Troubled bank industry continues California lobbying

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  • Existing California Civil Code (“CCC”) Section (“§”) 1923 addresses a very important need in California, regulating proprietary reverse mortgages. Unfortunately it also encompasses HECMs. The disclosure under CCC § 1923.5 is so flawed, it needs to either be eliminated or changed. CCC § 1923 and its subsections needs other substantial changes but the proposed legislation only adds additional problems.

    California Civil Code Section 1923.2(i)(2) has yet to be adequately overseen or enforced. It seems some national lending organizations are exempt from its provisions. CCC § 1923.2(i) [excluding CCC § 1923(i) Subsection (1)] states: “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) … , (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.” There are many questions regarding CCC § 1923(i)(2), such as if the referral is made in the prohibited period but the sale takes place three years later, would that the sale constitute a violation by the lender/originator? Or what if the originator introduces the borrower to an insurance salesperson for buying homeowner’s insurance and the insurance salesman sells an annuity instead?

    SB 660 does a great job of rewriting CCC § 1923.5, while AB 329 blindly retains it and simply adds to it. Both proposals require a new disclosure that is nothing more than a laundry list of items putting seniors on notice of things to consider for counseling purposes. Most of the items are written as if they are reasons for not getting a reverse mortgage rather than an impartial list of items to consider.

    Even though having spent substantial time advocating changes to CCC § 1923.5, especially the description of proceeds as additional income, it is difficult to support the passage of SB 660 let alone AB 329. While admiring Assemblyman Feuer, AB 329 should be defeated.

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