California law protects senior citizens from predatory lending

Law adds new regulation to reverse mortgages in the Golden State

Predatory lending has become quite a problem in the United States, as housing prices have increased. The value of the average home now exceeds $225, 000 and in California, the value is twice that. Such high values make it quite lucrative for criminals to steal the value of homes from either owners or lenders. A frequent target of mortgage and lending fraud is senior citizens, who may have lived in their homes for decades and who may have substantial equity in their property to lose. A common scam currently making the rounds is to persuade an older couple to take out a reverse mortgage and then to persuade them to invest the money in some sort of annuity that will make money for the criminal. A new law in California will put a stop to that.

A reverse mortgage is, just as the name implies, a home loan that pays money out to the homeowner rather than the other way around. If a homeowner is at least 62 years of age and owns their home, they may negotiate a reverse mortgage for some or all of the value of the property, taking out the value in a lump sum, monthly payments, or a line of credit. The money is repaid, with interest, at the time the home is sold, the owner moves or the owner dies. While there are some benefits to reverse mortgages, helping people who are “house rich” but “cash poor”, there are also some downsides. The fees are high and the owner will have no home to leave to family upon their death.

The rampant growth of real estate scams involving the elderly and reverse mortgages has prompted the new California law. Under its provisions, borrowers who seek a reverse mortgage must first undergo counseling at an agency that is approved by the department of Housing and Urban Development. This way, they can fully understand the nature of the loan and how it may affect them. All lending documents must be written in the language in which the original negotiations were conducted. If you discuss a loan in Russian, the lender may not, for instance, present you with loan documents written in English. In addition, lenders may not require that borrowers purchase an annuity as a condition of taking the loan.

Many unscrupulous lenders tell borrowers that an annuity will allow them to obtain money on a monthly or annual basis after taking out a reverse mortgage. Many people who don’t know how these loans work may not realize that they have the option of taking a monthly or annual payment without taking out an annuity. An annuity is just another way for the lender to make money off of what is already a fairly profitable loan.

California is far and away the largest market in the country for reverse mortgages. It has high property values and millions of longtime property owners who have large amounts of equity in their houses. As a result, California is a magnet for those disposed to loan fraud and to taking advantage of the elderly. It is hoped that passage of this new law will reduce the amount of fraud that takes place in the future.

If the new law is effective, perhaps other states will follow.