California’s Reverse Mortgage ‘Cooling Off’ Law Takes Effect

Starting Jan. 1, reverse mortgage professionals operating in California must comply with the new rules set forth by legislation passed in 2014, which requies lenders to observe a week-long “cooling off” period before assessing any fees or services from borrowers, among other provisions.

In October, California Governor Jerry Brown signed into law AB 1700, a bill sponsored by Assemblymember Jose Medina (D-Riverside) that requires lenders to wait seven days from the start of Home Equity Conversion Mortgage counseling before they can order appraisals, credit, title or other services.

Along with the “cooling period” provision, AB 1700 also amends a section of the California Civil Code, replacing a former Reverse Mortgage Counseling Checklist with a new Reverse Mortgage Worksheet Guide to be provided to borrowers prior to counseling sessions.

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But while the intent of the worksheet is to make borrowers aware of the various scenarios and considerations when determining if a reverse mortgage is right for them, some argue that this part of the legislation is redundant at best.

“The worksheet takes a lot of liberties as facts without fully explaining what they mean,” says Eric Meehan, owner and president of Golden Opportunity Mortgage, based in Solana Beach, Calif. “Yes, there are considerations in it, but many originators and counselors already talk about these considerations to their borrowers.”

Another area of concern has to do with the worksheet’s verbiage, which for some could be mistaken as having a negative connotation, as it contains repeated use of words like “not,” “cannot” and “fail,” as well as recurring allusions to the event of a borrower’s death throughout the four-page document.

“The context of how it’s written sounds like it was written by someone who’s against reverse mortgages,” Meehan says. “It’s a little disconcerting that these kinds of things are in play and are now part of the law in California.”

How these new rules stand to impact business for reverse mortgage professionals in 2015 and beyond remains to be seen, but one thing is clear: lenders, counselors and others working in the state will face another speedbump on top of the impending changes set to take effect for the industry nationwide.

“Not only does California have this [bill], but it also has the financial assessment coming up. So we have some work in front of us,” Meehan says. “But in the end this product is stronger, the industry has made it stronger, and it’ll thrive in the years to come.”

Written by Jason Oliva

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  • Sandy,

    The purpose of financial assessment is not to protect the FHA MMI Fund; it is to protect lenders/servicers with a slight potential benefit or detriment to the FHA MMI Fund. Wells Fargo officially left the industry because HUD did not implement financial assessment within a reasonable period of time even though the industry had been begging for it for years. MetLife never would have implemented financial assessment on its own unless the benefit was significant to MetLife. MetLife eventually left the industry in large part due to the failure of HUD to provide financial assessment. FHA will not accept a HECM for assignment that is in default for property charge payments. HUD will not reimburse lenders for these costs (however, on adjustable rate HECMs, servicers can use any remaining line of credit to pay off such defaults). Lenders/servicers do not want to continue guaranteeing ongoing property charges for HECMs which are in default for borrowers not making such payments.

    Why is suitability financially critical to HUD, the lender, and the taxpayer? The trouble for HUD and thus contingently taxpayers is when the balance due at termination is greater than the value of the home. It is the projected losses from this source which has caused HUD to lower Principal Limits and place restrictions on first year disbursements. The vast majority of the HECMs that will go full term and will result in tremendous losses to the MMI Fund are those where borrowers have found some measure of suitability from their HECMs.

    A seven day cooling off period will not generally help borrowers unless they use that time to do things they did not have time to do in determining if the HECM is suitable to them. So if the cooling off period results in a significant rise in seniors consulting competent and experienced financial planners to better determine suitability then the cooling off period is a wise decision. If not, this legislation is nothing more than an irrational and unreasonable intrusion into free trade which is not an usual California legislative practice.

  • Supposedly NRMLA is working with California legislators to modify the law so that in specific situations the cooling off period will not be applied to the taking of an application. Currently the law states: ” A lender shall not accept a final and complete application for a reverse mortgage loan from a prospective applicant or assess any fees upon a prospective applicant until the lapse of seven days from the date of counseling, as evidenced by the counseling certification.”

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