HOUSE BILL REPORT

HB 1311

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

As Reported by House Committee On:

Financial Institutions & Insurance

General Government Appropriations

Title: An act relating to reverse mortgage lending.

Brief Description: Regulating reverse mortgage lending practices.

Sponsors: Representatives Kirby, Bailey, Morrell, Sullivan, Kenney, Simpson and Nelson; by request of Department of Financial Institutions.

Brief History:

Committee Activity:

Financial Institutions & Insurance: 1/27/09, 1/29/09 [DP];

General Government Appropriations: 2/10/09, 2/17/09 [DP].

Brief Summary of Bill

  • Establishes financial requirements for certain reverse mortgage lenders.

  • Provides contractual standards for certain reverse mortgage loans.

HOUSE COMMITTEE ON FINANCIAL INSTITUTIONS & INSURANCE

Majority Report: Do pass. Signed by 11 members: Representatives Kirby, Chair; Kelley, Vice Chair; Bailey, Ranking Minority Member; Parker, Assistant Ranking Minority Member; Hurst, McCoy, Nelson, Roach, Rodne, Santos and Simpson.

Staff: Jon Hedegard (786-7127)

Background:

The Consumer Loan Act (CLA) authorizes the Department of Financial Institutions (DFI) to regulate consumer loan companies doing business in Washington. Consumer loan companies include mortgage lenders and consumer finance companies. Retail installment contracts are exempt from the CLA. The CLA:

In 2008 the Legislature passed Senate Bill 6471. This law applied the CLA to all loans made at any interest rate, not just those loans which exceed the rate established by the usury law (currently 12 percent). All loans must be calculated using a simple interest method which prohibits compounding interest. There are specific interest calculations for each billing cycle.

The Federal Housing Administration (FHA) is a federal program that provides mortgage insurance on specific types of loans. One such loan is a Home Equity Conversion Mortgage (HECM). A HECM is FHA's reverse mortgage program. To qualify a borrower must:

The FHA allows a person to borrow against the equity in their home. There are five payment plan options:

Payment options may be changed by the borrower for a fee of $20.

A HECM does not require repayment as long as the home is the borrower's principal residence. Lenders recover their principal, plus interest, when the home is sold. Any remaining value of the home goes to the borrower or their heirs. The borrower can never owe more than the home's value. If the sales proceeds are less than the amount owed, the FHA pays the lender the amount of the shortfall. The FHA collects an insurance premium from all borrowers to provide this coverage.

A HECM loan must be repaid in full when the borrower dies or sells the home. The loan also becomes due and payable if:

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Summary of Bill:

A "reverse mortgage loan" is defined as a nonrecourse consumer credit obligation in which:

2. the dwelling is transferred; or

3. the consumer ceases to occupy the dwelling as a dwelling.

Reverse mortgage loans are exempted from the compounding interest prohibition and the billing and interest calculations of the CLA.

Two categories of reverse mortgage loans are created:

A licensee offering proprietary reverse mortgage loans must:

The financial requirements do not apply if the licensee:

A proprietary reverse mortgage lender must:

The reverse mortgage loan may become due and payable upon the occurrence of any one of the following events:

Temporary absences from the home not exceeding 180 days do not cause the mortgage to become due and payable. Extended absences from the home exceeding 180 consecutive days, but less than one year, do not cause the mortgage to become due and payable if the borrower has taken prior action that secures and protects the home in a manner satisfactory to the lender.

A reverse mortgage lender must not:

A reverse mortgage loan may provide for a fixed or adjustable interest rate or a combination, including compound interest, and may also provide for interest that is contingent on the value of the property upon execution of the loan or at maturity, or on changes in value between closing and maturity.

A proprietary reverse mortgage loan product may not be offered without preapproval by the Department of Financial Institutions (DFI). The Director of the DFI may make rules regarding the preapproval process and may disapprove any proprietary reverse mortgage loan products that are unfair, ambiguous, misleading or are contrary to public policy. The DFI has specific authority to develop rules regarding the interpretation and implementation of this section.

If a lender defaults and fails to cure the default, the borrower, or the borrower's estate, is entitled to treble damages. A borrower may also seek other remedies provided under law.

A violation of federal legal requirements for an FHA-approved reverse mortgage is a violation of state law.

There are provisions for the treatment of advances and undisbursed reverse mortgage loan funds for the purpose of determining eligibility and benefits under means-tested programs.

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Appropriation: None.

Fiscal Note: Available.

Effective Date: The bill takes effect 90 days after adjournment of the session in which the bill is passed.

Staff Summary of Public Testimony:

(In support) Often, the implementation of legislation reveals inadvertent impacts. An unintended consequence from a bill last year impacted certain lenders. This bill fixes those problems and provides a regulatory framework for reverse mortgage lenders. The bill was worked on throughout the interim by the DFI and stakeholders. The DFI supports the bill. It corrects a problem from last year's bill that was not known at the time the bill was passed. Last year's bill put certain loans under the CLA. The CLA prohibits compounding interest. A reverse mortgage is based on compounding interest so certain types of reverse mortgages were unintentionally prohibited. The DFI reviewed reverse mortgage lending laws from around the country and developed a structure for this state. There have been many meetings with stakeholders and this bill is a product of those discussions. The state will be prepared for what may be a significant growth in the use of reverse mortgages. Reverse mortgages can be very useful but they can also be expensive and complex. This bill establishes certain consumer protections for borrowers. Certain reverse mortgages with federal oversight are not subject to this bill.

(Opposed) None.

Persons Testifying: Representative Kirby, prime sponsor; and Deborah Bortner, Department of Financial Institutions.

Persons Signed In To Testify But Not Testifying: None.

HOUSE COMMITTEE ON GENERAL GOVERNMENT APPROPRIATIONS

Majority Report: Do pass. Signed by 13 members: Representatives Darneille, Chair; Takko, Vice Chair; McCune, Ranking Minority Member; Armstrong, Blake, Dunshee, Hudgins, Kenney, Pedersen, Sells, Short, Van De Wege and Williams.

Staff: Serah Stetson (786-7109)

Summary of Recommendation of Committee On General Government Appropriations Compared to Recommendation of Committee On Financial Institutions & Insurance:

No new changes were recommended.

Appropriation: None.

Fiscal Note: Available.

Effective Date: The bill takes effect 90 days after adjournment of the session in which the bill is passed.

Staff Summary of Public Testimony:

(In support) This legislation corrects unintended consequences of Senate Bill 6471 which put certain loans under the Consumer Loan Act. Compounding interest is an integral part of reverse mortgage loans. This legislation is the result of work with stakeholders, industry and review of other state's best practices. Reverse mortgages are expected to rapidly increase in use and popularity. Reverse mortgage products can be very expensive and Washingtonians should know exactly what they are getting. The Department of Financial Institutions currently regulates this industry and this is simply an extension of that oversight.

(Opposed) None.

Persons Testifying: Levi Clemmens and Cindy Fazio, Department of Financial Institutions.

Persons Signed In To Testify But Not Testifying: None.