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National Mortgage Professional
Oct 19, 2008

Forward on reverse: Fixing California's SB 1609 : A conversation with James E. Veale of Security One Lending: Part IAtare E. Agbamu, CRMSreverse mortgage law, annuities, Housing and Economic Recovery Act of 2008 James E. Veale believes California's 2006 reverse mortgage law, SB 1609, needs improvement to better protect seniors and strengthen reverse mortgage origination practice in the Golden State. Among other provisions, SB 1609 barred California reverse mortgage lenders from selling annuities to borrowers or referring seniors to annuities sellers before loan closing or the expiration of borrowers' right of rescission. True to its pace-setting tradition, newly enacted federal law, the Housing and Economic Recovery Act of 2008, followed California's SB 1609 lead in this area. But Veale wants a better law. A senior vice president for government affairs at Security One Lending, James came to the reverse mortgage industry in 2005, following a distinguished career as a certified public accountant (CPA) and partner in charge of taxes with the CPA firm of Miller, Kaplan, Arase & Company LLP. He did tax work at Kaiser Steel and Fluor Corporation. At Arthur Young & Company, Veale handled auditing and tax issues. Along the way, he gave tax advice to many small businesses and to some of California's most prominent families. Below is a transcript of part one of our conversation. Reconciling state law with federal law Atare E. Agbamu: Jim, a review of SB 1609 suggests that most of the issues were already covered in federal laws and regulations. Why was SB 1609 necessary? James E. Veale: California lawmakers wanted to ensure that counseling and other requirements of the home equity conversion mortgage (HECM) would apply to proprietary reverse mortgages. One of the law's goals was to reconcile HECM requirements with other reverse mortgages offered in California. Background check, licensing, education, face-to-face meeting AEA: What are some existing issues SB 1609 didn't cover? JEV: I think the primary issue is the protection of seniors from originators who have criminal backgrounds and are not trained to offer this product to a protected class—seniors. Specifically, I would like California to require (and I have expressed this to California State Sen. Alan Lowenthal) reverse mortgage licensing. Reverse mortgage originators should be required to pass an examination and a criminal background check. For renewal, there should be a requirement for continuing education so that originators are up to date and are better qualified to match reverse mortgage products to the needs and financial goals of borrowers. Second, I firmly believe that face-to-face origination meetings should be mandated. This meeting will help seniors better evaluate the originator and determine if they want that person involved in their personal finances. AEA: You have a point there. Someone once said that trying to do reverse mortgage counseling over the phone is like trying to get a haircut over the phone. Could that analogy be applied to originating reverse mortgages over the phone? JEV: Exactly! One piece I would like to add to the renewal issue is that there should also be a criminal background check required each time the license is renewed. AEA: On the education requirement, who is going to design and evaluate the exam? The state may not have the expertise to do that yet. As you know, it is a different animal from traditional forward mortgages. JEV: One of the things we are all excited about in the industry is that the National Reverse Mortgage Lenders Association (NRMLA) is creating a professional credential. One of its features will be an examination that can be used to examine potential licensees for state purposes. You and I served on the committee that is working on the credential. AEA: Are you suggesting that California should use NRMLA's credential template? JEV: Absolutely! I believe that the work behind the NRMLA credential is more than adequate, and the state should be happy with the standards being developed. AEA: How about people who are going to say, for example, "Hey! The California reverse mortgage law is too tough; I am moving to Nevada because it is easier there." From Nevada, they may be able to solicit California reverse mortgage business. JEV: That is a problem right now. In the last year, out-of-state originators have been entering California, trying to finance the sale of annuities through the origination of reverse mortgages, which, under state law, is illegal. California is having difficulty enforcing this part of the law. AEA: So you would also like to see restrictions placed on out-of-state solicitors, right? JEV: That's exactly right! In other words, the only way an individual could originate a reverse mortgage within California is if they hold a current California reverse mortgage origination license. AEA: And you can't transfer that license to a surrogate, right? JEV: Absolutely not! It should not be a transferable license. The licensee must be the party originating the reverse mortgage. Multiple oversight, weak enforcement AEA: What of exemptions? In some states, for example, some professionals may be exempt from licensing if they originate, say, just three loans a year. Do you see exemptions of any kind in the California law you envision? JEV: No. Enforcement is hard enough as it is. I'm sure we both appreciate how hard it would be to determine if an originator is in violation of a threshold licensing rule, especially regarding those changing employers or moving in state. Tracking would be difficult, if not practically impossible, in most cases. One of the things that makes this law unwieldy is no single agency has responsibility to enforce and discipline those who are in violation of SB 1609. At least two state agencies oversee it—the California Department of Corporations for state-chartered banks and California financial lenders, and the California Department of Real Estate for those originating under real estate license laws. The national banks present their own enforcement issues that are not easily resolved. You can see how conflicts, differences and uneven enforcement, among other problems, could quickly develop when more than one agency has this responsibility. With reverse mortgage licensing responsibilities under one state agency, enforcement would be easier, more effective, more efficient and far more equitable. AEA: Besides the multiple agencies problem, do these agencies have the budget to do enforcement? California is a fairly large state. JEV: As most of us are aware, California is having budgetary problems right now. That was one of the questions Sen. Lowenthal brought up. My response is that the licensing program should pay for itself. Fees could be assessed for things like license renewal, the examination, the issuance of the original license, administrative actions such as notification of changes in address and other items or so that the state does not incur a loss by creating this license program. AEA: It appears that key provisions of SB 1609 were incorporated into the just enacted federal Housing and Economic Recovery Act of 2008. Are you happy with this development? Or is there anything you don't like about the new federal law? JEV: Well, I have to give a lot of kudos to Congress for trying to establish and maintain a national registry of loan originators. However, I don't think just having a registry alone is enough to protect a vulnerable class like seniors. Therefore, we also need examinations to screen out people who do not understand the products. I do not believe the federal government needs to oversee this process. Certainly, it could be established and maintained by the states just like licensing of attorneys, CPAs, real estate brokers and other professionals. However, just having an originator registry is a noble step forward. "Income" is a concern AEA: You are concerned about the industry's habit of calling reverse mortgage proceeds "income." Why does this habit disturb you? JEV: In this law (SB 1609), there is a section that requires originators to give the borrower a statement which states: "A reverse mortgage is a complex financial transaction that provides a means of using the equity you have built up in your home ... as a source of additional income." The problem with the word "income" is that under financial accounting, and even tax law, income is something you receive and do not have to repay. So, to put this provision into the law sounds like the state is saying that the proceeds do not have to be repaid. We had one couple turn down a reverse mortgage when they read this section because they felt the state was warning borrowers that the proceeds are taxable income. This was their only objection throughout the process. Despite their needs, they decided not to move forward. So, the word "income" is confusing because it does not express what reverse mortgage proceeds actually are—loan proceeds. AEA: You are correct. Selling annuities to seniors: Un-leveled playing field, legal risks JEV: And Atare, there is another part of this law that I would like to quickly address. AEA: Go ahead. JEV: In SB 1609, beyond the requirement that the purchase of an annuity cannot be required as part of a reverse mortgage transaction, the following is also mandated: "A reverse mortgage lender or broker arranging a reverse mortgage shall not ... refer the borrower to anyone for the purchase of an annuity prior to the closing of the reverse mortgage or before the termination of the right of the borrower to rescind the reverse mortgage agreement." Even though the sentence appears simple and straightforward, it is also of great concern as to its potential legal implications. For example, an originator refers a borrower to the borrower's own property insurance agent to obtain more homeowner's insurance coverage as stipulated by the underwriter. During the meeting, the insurance agent convinces the borrower to use a significant portion of the proceeds to get an equity-indexed annuity. The following year, both the borrower and the insurance agent died. The borrower's heirs remembered that the originator had recommended that the homeowner's policy coverage be increased and that the borrower purchase an equity-indexed annuity, though the reverse mortgage originator knew nothing about the annuity purchase and would have discouraged any such transaction. Even if the originator can prove that he had no knowledge of the annuity acquisition, imagine the time and legal costs incurred if the heirs seek recourse or legal action against the originator. Now, what happens if the originator cannot adequately prove he had no knowledge of the annuity transaction? This wording in the law needs to be changed. Atare Agbamu is the author of Think Reverse (The Mortgage Press, 2008) and more than 100 articles on reverse mortgages. He is a reverse mortgage specialist in Minnesota and an adviser to older adults, their families, professionals and institutions across the country. He may be reached by phone at (612) 203-9434 or e-mail [email protected] To offer comments on his book, visit and click on the "Bookfeedback" page. To place an order, log on to
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