Recently, state regulators in California seem determined to limit the use of reverse mortgages to seniors with an “immediate need for cash” who “have no other means.” The reaction is beginning to chill long relationships between legislatures and some insurance producers, and even upset hourly fee-based certified financial planners (CFPs) and registered investment advisors (RIAs).
Recent California Legislation
Last year, California passed a law that effectively restricts insurance producers from originating reverse mortgages.
“An insurance broker or agent shall not participate in, be associated with, or employ any party that participates in, or is associated with, the origination of a reverse mortgage, unless the insurance agent or broker maintains procedural safeguards designed to ensure that the agent or broker transacting insurance has no direct financial incentive to refer the policyholder or prospective policyholder to a reverse mortgage lender.”
THE NEW LAW ALSO PROHIBITS INSURANCE PRODUCERS FROM OBTAINING COMPENSATION IN THE FOLLOWING SITUATION:
(1) Except as provided in subdivision (b), individuals transacting insurance shall not receive compensation, commission, or direct incentive for providing reverse mortgage borrowers with a noncasualty insurance product that is connected to or a result of the reverse mortgage.
(b) This section does not prevent an agent or broker from offering title insurance, hazard, flood, or other peril insurance, or other similar products that are customary and normal under a reverse mortgage loan.
This 2011 law deals specifically with the sale of annuities.
“‘Suitability information’ means information that is reasonably appropriate to determine the suitability of a recommendation.”
The 13th item is “Whether or not the consumer has a reverse mortgage.”
Response of the Key Regulator
Immediately upon passage, the California commissioner of insurance released a statement urging the governor to sign AB 689 and AB 793 into law. “There is an increasing need for [these bills] as the growth of the reverse mortgage business has led to aggressive marketing and abuse, especially when they are marketed along with insurance products such as annuities,” Commissioner Jones
said. “A reverse mortgage should be an option of last resort only for seniors with an immediate need for cash and [who] have no other means.”
An attorney from the California Department of Insurance (CA DOI) called me to clarify several questions raised by originators and insurance producers in and outside of California.
The attorney said the commissioner could take action against repeat violators of AB 793 that would not only prohibit compensation, but also suspend or terminate their licenses and annuity endorsements. When pressed further about how this penalty would be practically enforced, the attorney was worrisomely vague.
The CA DOI attorney stated that the primary concern of the department was new acquisitions of prohibited products, not necessarily residuals or renewals. When asked how the department viewed the meaning of “connected to or a result of the reverse mortgage,” she said they will be looking for the use of reverse mortgage proceeds and they expect to use the standard of presumed use if a reverse mortgage is in place. Many of us had hoped that the interpretation would be limited to transactions surrounding the time the reverse mortgage was funded.
The CA DOI attorney went on to describe the reason for the legislation, noting that the department was informed of numerous instances of reverse mortgage originators working together with insurance producers to provide funds for questionable sales of insurance products throughout the state. One example she acknowledged was a husband-and-wife team who visited California regularly from a neighboring state and presented seminars during which the wife would provide the reverse mortgage as the means to obtain the annuities that the husband (a fully licensed California life agent with annuity endorsement) was selling at the same seminar. Apparently they were quite successful.
While the statements of the CA DOI attorney are not binding to the CA DOI, they are indicative of the direction enforcement will tend to take. It seems the commissioner does not view reverse mortgages as something that should be incorporated into financial planning for the more affluent, but something that should be relegated to “an option of last resort” for the less affluent.
Repercussions of Mainstreaming
Since California law does not distinguish between proprietary reverse mortgages and HECMs, could these new laws impede the reintroduction of proprietary reverse mortgage products in California? Will it mean insurance companies will be less interested in providing reverse mortgage
Some insurance companies are rumored to be unaware of the new law. At least one insurance company is looking into taking back commissions earned from transactions with reverse mortgage borrowers, going back to the date of enactment rather than the later date when it actually went into effect. Without direction from employers, some California insurance producers who are also NMLS licensees are looking at voluntarily dropping their NMLS licenses. For the near future, the situation will be in some turmoil.
While the new legislation would not appear to have any impact on those who use reverse mortgages strictly as a replacement for cash reserves, insurance producers will have to ensure that the funds being used to purchase prohibited products are not coming from the reverse mortgage. In regard to annuities, most sellers will no doubt end up concluding that they are unsuitable for anyone who has a reverse mortgage outstanding. (The law did not differentiate between fixed- and adjustable-rate reverse mortgage products.) Outside of California the challenge will be in helping insurance producers understand that the new rules only apply to transactions requiring a California insurance license or otherwise governed by California insurance law.
Several have pointed out that the only opponents to the legislation at the committee level were NRMLA and MetLife. Some have asked where the MBA and other lenders, particularly those lenders with insurance activities in California, stand in regard to the legislation.
In May 2012, the Financial Planning Association of Orange County, California, held its quarterly education forum at the University of California in Irvine. One of its guest speakers was Dr. John Salter, CFP, director of the personal financial planning department at Texas Tech University. Those who attended seemed very intrigued by the use of HECMs in financial planning. Unfortunately, few of those attending were aware of AB 793 and those who were did not address the issue. The same was true of the NRMLA convention, also held in Irvine in 2012.
Right now there is no major move to repeal or amend AB 793. It seems that California originators will encounter less acceptance of reverse mortgages as a financial planning tool in the financial advising community in California than in other states.