New law will give residents more choices for reverse mortgages
Published 4:47 pm Friday, May 8, 2009
Washington state consumers will soon have more reverse mortgage safeguards in place, and they will have access to more reverse mortgage lenders.
Gov. Chris Gregoire recently signed HB 1311, which provides a solution to a bill passed last year that inadvertently curtailed the number of lenders able to offer reverse mortgages. HB 1311 takes effect July 26.
A year ago, Washington state consumers pushed their representatives to increase lender licensing requirements and scrutinize all negative amortization loans. Negative amortization occurs when the monthly loan payment is less than the principal and interest needed to pay off the loan in a specific period of time. The difference is added to the loan amount, so that the borrower owes more than the amount initially borrowed.
Since negative amortization is a key component of all reverse mortgages currently in the marketplace, the number of lenders offering reverse mortgages was limited to “exempt” lenders — those operating under Washington or federal law as banks, trust companies, thrifts and credit unions — but not necessarily their subsidiaries, affiliates or correspondents.
“This is a benefit to Washington consumers because for the past year, only brokers or exempt lenders were able to offer reverse mortgages in this state,” said Sarah Hulbert, chief executive of Renton-based Senior Financial Corp., a reverse mortgage specialist. “With the implementation of HB 1311, Washington seniors will have access to a broader group of reverse mortgage lenders.”
Reverse mortgages allow senior homeowners, with a minimum age of 62, to receive proceeds from a lender — either in a lump sum, regular monthly payments, a line of credit or in a combination of those options. Interest is charged on the amount drawn, adding to the original amount and, thus, negative amortization. The borrower makes no monthly payments and cannot owe more than the value of the home. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is due and repaid.
The original legislation — SB 6471 — required that all “nonexempt lenders” doing business in Washington be licensed by the Department of Financial Institutions under the Consumer Loan Act (CLA) by June 12, 2008. Lender entities generally exempt from this change are those operating under Washington or federal law as banks, trust companies, thrifts and credit unions — but not necessarily their subsidiaries, affiliates or correspondents.
The new law also includes language that requires state approval of any proprietary reverse mortgage products offered in our state, with specific requirements outlined in the legislation. Consumer protections are also introduced, including a new required disclosure to consumers, clear identification on the Deed of Trust indicating the deed secures a reverse mortgage and also wording surrounding the cross sale of annuities to reverse mortgage borrowers.
One of the more disturbing findings provided by reverse mortgage borrowers was the number of lenders requiring — or suggesting — that an annuity product be purchased at the time the reverse mortgage was closed. Typically, an annuity is a contract between a consumer and an insurance company. In its simplest form, you pay money to an annuity issuer, and the issuer then pays the principal and earnings back to you or to a named beneficiary. Annuities are generally used to provide income in retirement.
The new law takes dead aim at annuities and prohibits lenders from engaging in any of the following actions:
Offering an annuity to the borrower prior to the loan closing or before the expiration of the right of the borrower’s rescission rights;
Referring the borrower to anyone for the purchase of an annuity prior to the loan closing or before the expiration of the right of the borrower’s rescission rights;
Providing marketing information or annuity sales leads to anyone regarding the borrower, or receiving any compensation for such an annuity sale or referral.
FHA-Insured Home Equity Conversion Mortgages account for the vast majority of reverse mortgages originated in the country. Since the FHA-insured reverse mortgage already has many stringent consumer protections in place, it is exempt from these requirements.
Deb Bortner, director of consumer services for the Washington state Department of Financial Institutions, said the intent of the original bill was not to limit or curtail reverse mortgages.
“This is an example of unintended circumstances resulting from a particular bill. It is not something I would have wanted to have happen.”
Bortner said the solution, however, would have to come from the Legislature. HB 1311 provided that solution.
E-mail Tom Kelly at www. tomkelly.com.
