FINAL BILL REPORT

EHB 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.

C 149 L 09

Synopsis as Enacted

Brief Description: Regulating reverse mortgage lending practices.

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

House Committee on Financial Institutions & Insurance

House Committee on General Government Appropriations

Senate Committee on Financial Institutions, Housing & Insurance

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 legislation was enacted that 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 his or her 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 his or her 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:

Summary:

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

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:

Lender and any other parties that participate in the origination of a reverse mortgage loan may not require an applicant to purchase insurance or other products as a condition of the loan.

Lender and other parties that participate in the origination of a reverse mortgage loan are prohibited from selling any other insurance or financial product to the borrower.

A borrower in a proprietary reverse mortgage transaction has the right to rescind within three business days of the transaction.

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 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.

Votes on Final Passage:

House

97

0

Senate

47

0

Effective:

July 26, 2009