California enacts reverse mortgage insurance law
Beginning in 2012, a new California law will require insurance written on reverse mortgage originations to be arms-length transactions. According to law firm Patton Boggs, this means that the latest regulation, effective Jan. 1, "prohibits insurance brokers and agents from participating in, being associated with or being employed by any party that participates in or is associated with the origination of reverse mortgages," according to a note sent to clients, "unless the broker or agent maintains procedural safeguards that ensure that he or she does not have a direct financial incentive to refer a policyholder or a prospective candidate for a policy to a reverse mortgage lender." Brett Varner, a manager in the reverse mortgage division of Irvine Calif.-based Greenlight Financial, said the goal of the law is to prohibit financial incentives between insurance agents/brokers and reverse mortgage originators. This is to avoid a situation that may lead to inappropriate cross-selling of reverse mortgages and other financial or insurance products. "The net effect of the law creates the impression that reverse mortgages should not be used in conjunction with purchasing these products, or that it is illegal to do so," Varner said. "However, the goal is just to eliminate a financial incentive that could encourage actions not in the best interest of senior clients," he added. The best interests of senior citizens are considered universal by the mortgage industry. These include providing comprehensive retirement planning, addressing concerns about long-term care and acknowledging a desire for borrowers to remain in their homes as they age. According to Varner, the concept for the law was addressed in the Housing and Economic Recovery Act of 2008 and from the Housing and Urban Development’s subsequent Mortgagee Letter 2008-24, released in September 2008, which bars similar activity. "The California law essentially codes into state law rules that already existed on the federal level, so the only firms that should be unprepared are those who still have inappropriate referral relationships related to these products," he said. Write to Jacob Gaffney. Follow him on Twitter: @JacobGaffney.