Reverse Mortgage Legislation Update: April 19, 2010

Last week the US Department of Housing and Urban Development released data showing the number of borrowers unable to make their mortgage modification payments nearly doubled in March. In addition, several pieces of reverse mortgage legislation were discussed at the state level.

Louisiana HB792, which provides for the regulation of reverse mortgages, was considered on Tuesday and assigned to the House Commerce Committee. The majority of the bill follows the same guidelines as the HECM program, with several exceptions. These include a 30 day right of rescission, and the requirement that borrowers receive a list of all counselors in the state. It also notably requires that reverse mortgage lenders “act in the best interest of the elder, with the utmost care, honesty, and undivided loyalty, diligence, and good faith towards the elder…”

Maryland passed its Reverse Mortgage Bill unanimously last week, HB799 and SB878.

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The Maryland Bill states that federally insured HECMs must abide by federal regulations, but if the reverse mortgage is privately insured, it does not need to abide by those regulations, including the $6,000 origination fee limit, maximum claim amounts or government insurance requirement. In addition, reverse mortgage lenders are not explicitly required to offer any particular payment plan in conjunction with reverse mortgage loans.

Cross-selling is prohibited by the bill, which forbids a lender from requiring a borrower to purchase an annuity, a long-term care policy or other financial or insurance product as a condition to obtaining a reverse mortgage loan, except for title insurance, flood insurance, and other catastrophe insurance as required for a reverse mortgage loan to be transacted in accordance with federal guidelines. A borrower may also not be referred by a lender to anyone for the purchase of an annuity or other financial or insurance product until the loan is closed and the period of rescission has ended, with the exception of title insurance, hazard insurance, and “other products that are customary under a reverse mortgage loan.”

The bill was sent to Governor Martin O’Malley for his signature.

Written by Reva Minkoff

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  • HECM_Dude,rnrnI concur with The Critic. rnrnLast November our panel at NRMLA brought this issue to light. Later in the comments of a RMD article Mr. Prescott Cole and I disagreed on this issue. In that thread, Mr. Cole made it clear that he believed because the fiduciary duty standard had been removed from AB 329, it was not in the law. He now agrees that the fiduciary duty standard is the standard required of those addressed in Section 2 of AB 260. rnrnMr. Cole is a California attorney who is responsible for much of the language in AB 329. He is a senior advocate and a force to be reckoned with in the California legislative process. I met him through the discourse we had on RMD and I believe we both have come to respect one another and even have become friends in the process.rnrnThe reason why the fiduciary duty standard was taken out of AB 329 was because it was already in AB 260, a much broader and more pervasive bill. If there was a lobbying effort to remove the fiduciary duty standard as the standard by which reverse mortgages must be originated, those lobbying efforts failed or were blindsided at best. The fiduciary duty standard is the standard by which all mortgages must be originated in California by those originators to whom California Civil Code 2923.1 (as added by AB 260) applies. rn

  • HECM_Dude,rnrnWhere did you get that information from? Here is the law.rnrnSection 2 of Assembly Bill 260 signed into law by Governor Arnold Schwarzenegger on October 11, 2009 (the same day that Assembly Bill 329 was signed into law) which took effect on January 1, 2010, reads as follows:rnrnSEC. 2. rnrnSection 2923.1 is added to the Civil Code, to read:rnrn2923.1. (a) A mortgage broker providing mortgage brokerage services to a borrower is the fiduciary of the borrower, and any violation of the brokeru2019s fiduciary duties shall be a violation of the mortgage brokeru2019s license law. This fiduciary duty includes a requirement that the mortgage broker place the economic interest of the borrower ahead of his or her own economic interest. A mortgage broker who provides mortgage brokerage services to the borrower owes this fiduciary duty to the borrower regardless of whether the mortgage broker is acting as an agent for any other party in connection with the residential mortgage loan transaction.rnrn(b) For purposes of this section, the following definitions apply:rnrn(1) u201cLicensed personu201d means a real estate broker licensed under the Real Estate Law (Part 1 (commencing with Section 10000) of Division 4 of the Business and Professions Code), a finance lender or broker licensed under the California Finance Lenders Law (Division 9 (commencing with Section 22000) of the Financial Code), a residential mortgage lender licensed under the California Residential Mortgage Lending Act (Division 20 (commencing with Section 50000) of the Financial Code), a commercial or industrial bank organized under the Banking Law (Division 1 (commencing with Section 99) of the Financial Code), a savings association organized under the Savings Association Law (Division 2 (commencing with Section 5000) of the Financial Code), and a credit union organized under the California Credit Union Law (Division 5 (commencing with Section 14000) of the Financial Code).rnrn(2) u201cMortgage brokeru201d means a licensed person who provides mortgage brokerage services. For purposes of this section, a licensed person who makes a residential mortgage loan is a u201cmortgage broker,u201d and subject to the requirements of this section applicable to mortgage brokers, only with respect to transactions in which the licensed person provides mortgage brokerage services.rnrn(3) u201cMortgage brokerage servicesu201d means arranging or attempting to arrange, as exclusive agent for the borrower or as dual agent for the borrower and lender, for compensation or in expectation of compensation, paid directlyrnor indirectly, a residential mortgage loan made by an unaffiliated third party.rnrn(4) u201cResidential mortgage loanu201d means a consumer credit transaction that is secured by residential real property that is improved by four or fewer residential units.rnrn(c) The duties set forth in this section shall not be construed to limit or narrow any other fiduciary duty of a mortgage broker.rnrn

  • The duty of care of a loan originator in California has been elevated by recent legislation; however, it does not rise to that of a fiduciary. Thanks to successful lobbying by the industry, the additional duties are to make certain the borrower is receiving a loan he or she can reasonably afford to repay, and that the borrower is receiving loan terms that are commensurate with his or her qualifications (i.e., not offering a sub-prime loan to a borrower who qualifies for prime financing).

  • HECM_Dude,rnrnYou are correct; however, in California both those licensed as CFLs and through the Dept. of Real Estate, are now held to that standard due to legislation passed last year. I believe James Veale and Prescott Cole addressed this in an earlier article.

  • Actually the 30 day rescission in MN was reduced down to 10 days during the first committee meeting. Not that 10 days is a lot better. I understand they are still trying to push for a 10 day rescission here in MN as well as an 18 month period where insurance products cannot be purchased after the RM closing, and a suitability clause.

  • Louisiana HB792,a 30 day right of rescission added to the frying Pan. All we need is one state to impose a 30 day right of rescission and the rest will start following.rnrnThe problem is, we have politicians making decisions in areas they don’t understand. Do they have any idea what a 30 rescission period will do to the capital markets alone? What about the senior, 30 days could mean the difference in a foreclosure, a medical emergency or a multitude of other hardships caused.rnrnWhat is happening in this country. We impose so many regulations and ignorant changes on a program that did so much good for our senior citizens. We are picking it apart, little by little, until, one day it will go away. It is sad to see what has taken place over the past 16 months to the reverse mortgage industry.rnrnLouisiana is also calling for a list of all the counselors in their state to be given to the borrower. Can you believe this, common sense thrown right out the window. One comment made by “Save the HECM” was, you better have a big envelope to send that out in. Give me a break, what is the logic behind having to give someone the entire counseling list in the state? It will be fun to see what the house commerce committee does with it.rnrnJohn A. Smaldonern

  • It is very risky for a reverse mortgage originator to hold him- or herself out as a professional having a fiduciary relationship with the borrower. One must adhere to a much higher standard of care in such a relationship that may, in some circumstances, conflict with our duty to our employer, broker or lender. nnOur relationship with the borrower is NOT that of professional/client. It is that of salesperson/customer. We are NOT acting as attorneys or financial advisers. We are selling a product. This is an important distinction. In the salesperson/customer relationship, the standard is one of good faith and fair dealing, which still is not to be taken lightly.nnLet’s not hold ourselves out to be something we’re not, or the states will do it for us.

  • It also notably requires that reverse mortgage lenders u201cact in the best interest of the elder, with the utmost care, honesty, and undivided loyalty, diligence, and good faith towards the elderu2026″rnrnWhile this sounds good and is very admirable it is very vague and who decides whether this criteria is met? Could selling a fixed rate when the adjustable with a credit line or tenure might have been more appropriate fall under any of these categories?rnrnIf so lender’s and broker’s beware!! rnrn

  • Save the HECM,rnrnWhile California changed its legislation, Minnesota did not. It took the Governor vetoing that bill; otherwise, Minnesota would have been the first state with a 30 day rescission period on reverse mortgages.rnrnThe Maryland bill appears to be very similar to California law although the California law with rare exception references federal law. The Louisiana proposal seems very close to how the California proposal was originally introduced to its Assembly. rnrnIt would seem worthwhile to have a model act resulting from a convention of the principal players in the industry and state governments. It is no surprise that the states are ignoring the MBA model bill. Its few provisions are so poorly written that unless substantial work is done on it, it will turn out to be nothing more than an uninteresting and generally forgotten curiosity of that organization.rn

  • You would think Louisiana lawmakers might research the viability of a 30 day recision period that if enacted would effectively end reverse mortgages in their state. California and Minnesota had similar provisions in early drafts of their bills, only to remove such a lengthly recision period becoming aware of the harmful consequences.nnAs far a listing ALL Hud counseling agencies in the state… better have a thick envelope to send that list.

  • You would think Louisiana lawmakers might research the viability of a 30 day recision period that if enacted would effectively end reverse mortgages in their state. California and Minnesota had similar provisions in early drafts of their bills, only to remove such a lengthly recision period becoming aware of the harmful consequences.

    As far a listing ALL Hud counseling agencies in the state… better have a thick envelope to send that list.

    • Save the HECM,

      While California changed its legislation, Minnesota did not. It took the Governor vetoing that bill; otherwise, Minnesota would have been the first state with a 30 day rescission period on reverse mortgages.

      The Maryland bill appears to be very similar to California law although the California law with rare exception references federal law. The Louisiana proposal seems very close to how the California proposal was originally introduced to its Assembly.

      It would seem worthwhile to have a model act resulting from a convention of the principal players in the industry and state governments. It is no surprise that the states are ignoring the MBA model bill. Its few provisions are so poorly written that unless substantial work is done on it, it will turn out to be nothing more than an uninteresting and generally forgotten curiosity of that organization.

      • Actually the 30 day rescission in MN was reduced down to 10 days during the first committee meeting. Not that 10 days is a lot better. I understand they are still trying to push for a 10 day rescission here in MN as well as an 18 month period where insurance products cannot be purchased after the RM closing, and a suitability clause.

  • It also notably requires that reverse mortgage lenders “act in the best interest of the elder, with the utmost care, honesty, and undivided loyalty, diligence, and good faith towards the elder…”

    While this sounds good and is very admirable it is very vague and who decides whether this criteria is met? Could selling a fixed rate when the adjustable with a credit line or tenure might have been more appropriate fall under any of these categories?

    If so lender's and broker's beware!!

  • It is very risky for a reverse mortgage originator to hold him- or herself out as a professional having a fiduciary relationship with the borrower. One must adhere to a much higher standard of care in such a relationship that may, in some circumstances, conflict with our duty to our employer, broker or lender.

    Our relationship with the borrower is NOT that of professional/client. It is that of salesperson/customer. We are NOT acting as attorneys or financial advisers. We are selling a product. This is an important distinction. In the salesperson/customer relationship, the standard is one of good faith and fair dealing, which still is not to be taken lightly.

    Let's not hold ourselves out to be something we're not, or the states will do it for us.

    • HECM_Dude,

      You are correct; however, in California both those licensed as CFLs and through the Dept. of Real Estate, are now held to that standard due to legislation passed last year. I believe James Veale and Prescott Cole addressed this in an earlier article.

      • The duty of care of a loan originator in California has been elevated by recent legislation; however, it does not rise to that of a fiduciary. Thanks to successful lobbying by the industry, the additional duties are to make certain the borrower is receiving a loan he or she can reasonably afford to repay, and that the borrower is receiving loan terms that are commensurate with his or her qualifications (i.e., not offering a sub-prime loan to a borrower who qualifies for prime financing).

      • HECM_Dude,

        Where did you get that information from? Here is the law.

        Section 2 of Assembly Bill 260 signed into law by Governor Arnold Schwarzenegger on October 11, 2009 (the same day that Assembly Bill 329 was signed into law) which took effect on January 1, 2010, reads as follows:

        SEC. 2.

        Section 2923.1 is added to the Civil Code, to read:

        2923.1. (a) A mortgage broker providing mortgage brokerage services to a borrower is the fiduciary of the borrower, and any violation of the broker’s fiduciary duties shall be a violation of the mortgage broker’s license law. This fiduciary duty includes a requirement that the mortgage broker place the economic interest of the borrower ahead of his or her own economic interest. A mortgage broker who provides mortgage brokerage services to the borrower owes this fiduciary duty to the borrower regardless of whether the mortgage broker is acting as an agent for any other party in connection with the residential mortgage loan transaction.

        (b) For purposes of this section, the following definitions apply:

        (1) “Licensed person” means a real estate broker licensed under the Real Estate Law (Part 1 (commencing with Section 10000) of Division 4 of the Business and Professions Code), a finance lender or broker licensed under the California Finance Lenders Law (Division 9 (commencing with Section 22000) of the Financial Code), a residential mortgage lender licensed under the California Residential Mortgage Lending Act (Division 20 (commencing with Section 50000) of the Financial Code), a commercial or industrial bank organized under the Banking Law (Division 1 (commencing with Section 99) of the Financial Code), a savings association organized under the Savings Association Law (Division 2 (commencing with Section 5000) of the Financial Code), and a credit union organized under the California Credit Union Law (Division 5 (commencing with Section 14000) of the Financial Code).

        (2) “Mortgage broker” means a licensed person who provides mortgage brokerage services. For purposes of this section, a licensed person who makes a residential mortgage loan is a “mortgage broker,” and subject to the requirements of this section applicable to mortgage brokers, only with respect to transactions in which the licensed person provides mortgage brokerage services.

        (3) “Mortgage brokerage services” means arranging or attempting to arrange, as exclusive agent for the borrower or as dual agent for the borrower and lender, for compensation or in expectation of compensation, paid directly
        or indirectly, a residential mortgage loan made by an unaffiliated third party.

        (4) “Residential mortgage loan” means a consumer credit transaction that is secured by residential real property that is improved by four or fewer residential units.

        (c) The duties set forth in this section shall not be construed to limit or narrow any other fiduciary duty of a mortgage broker.

      • HECM_Dude,

        I concur with The Critic.

        Last November our panel at NRMLA brought this issue to light. Later in the comments of a RMD article Mr. Prescott Cole and I disagreed on this issue. In that thread, Mr. Cole made it clear that he believed because the fiduciary duty standard had been removed from AB 329, it was not in the law. He now agrees that the fiduciary duty standard is the standard required of those addressed in Section 2 of AB 260.

        Mr. Cole is a California attorney who is responsible for much of the language in AB 329. He is a senior advocate and a force to be reckoned with in the California legislative process. I met him through the discourse we had on RMD and I believe we both have come to respect one another and even have become friends in the process.

        The reason why the fiduciary duty standard was taken out of AB 329 was because it was already in AB 260, a much broader and more pervasive bill. If there was a lobbying effort to remove the fiduciary duty standard as the standard by which reverse mortgages must be originated, those lobbying efforts failed or were blindsided at best. The fiduciary duty standard is the standard by which all mortgages must be originated in California by those originators to whom California Civil Code 2923.1 (as added by AB 260) applies.

  • Louisiana HB792,a 30 day right of rescission added to the frying Pan. All we need is one state to impose a 30 day right of rescission and the rest will start following.

    The problem is, we have politicians making decisions in areas they don't understand. Do they have any idea what a 30 rescission period will do to the capital markets alone? What about the senior, 30 days could mean the difference in a foreclosure, a medical emergency or a multitude of other hardships caused.

    What is happening in this country. We impose so many regulations and ignorant changes on a program that did so much good for our senior citizens. We are picking it apart, little by little, until, one day it will go away. It is sad to see what has taken place over the past 16 months to the reverse mortgage industry.

    Louisiana is also calling for a list of all the counselors in their state to be given to the borrower. Can you believe this, common sense thrown right out the window. One comment made by “Save the HECM” was, you better have a big envelope to send that out in. Give me a break, what is the logic behind having to give someone the entire counseling list in the state? It will be fun to see what the house commerce committee does with it.

    John A. Smaldone

  • HECM_Dude,rnrnI concur with The Critic. rnrnLast November our panel at NRMLA brought this issue to light. Later in the comments of a RMD article Mr. Prescott Cole and I disagreed on this issue. In that thread, Mr. Cole made it clear that he believed because the fiduciary duty standard had been removed from AB 329, it was not in the law. He now agrees that the fiduciary duty standard is the standard required of those addressed in Section 2 of AB 260. rnrnMr. Cole is a California attorney who is responsible for much of the language in AB 329. He is a senior advocate and a force to be reckoned with in the California legislative process. I met him through the discourse we had on RMD and I believe we both have come to respect one another and even have become friends in the process.rnrnThe reason why the fiduciary duty standard was taken out of AB 329 was because it was already in AB 260, a much broader and more pervasive bill. If there was a lobbying effort to remove the fiduciary duty standard as the standard by which reverse mortgages must be originated, those lobbying efforts failed or were blindsided at best. The fiduciary duty standard is the standard by which all mortgages must be originated in California by those originators to whom California Civil Code 2923.1 (as added by AB 260) applies. rn

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