Ariz. adopts new rules on reverse mortgages

Gov. Jan Brewer signed legislation to create the state's first-ever oversight of the increasingly popular financial option for cash-poor seniors to be able to take some equity out of their homes without fear of winding up on the street.

Much of what the new law requires is simply in the form of disclosure. Borrowers would need to be provided information, in detail and up front, about the costs and conditions of the loan, including special fees and what actions will make it payable before the homeowner dies.

The new law also imposes limits on what other kinds of products lenders can try to induce borrowers to buy.

And it mandates that borrowers get independent financial counseling before they obtain reverse mortgages.

The changes take effect July 29.

Many homeowners already have some protections under federal law.

But a "significant segment" of the reverse-mortgage market is not subject to federal regulations, said Assistant Attorney General Jennifer Boucek. She said these are mortgages not backed by federal insurance, but instead backed by the company that issues them.

Boucek said these proprietary mortgages tend to be more expensive and carry higher interest rates than their federally insured counterparts.

Until now, they have been without any regulation at all.

In essence, a reverse mortgage is a home-equity loan, allowing homeowners with little or no money left to pay on mortgages to get money. Borrowers can get all the money upfront, at regular intervals or on a schedule and in amounts agreed to by both sides.

The big difference is that the loan requires no payment while the borrower lives in the home. It can be paid off, with interest by heirs, or the homeowner can pay it off.

That also means that, generally speaking, the borrower can't be kicked out of a home. There are exceptions, such as failure to pay for repairs, insurance and property taxes. And a loan becomes due when a borrower moves out.

Rep. Bill Konopnicki, R-Safford, who sponsored the Arizona legislation, said it fills a gap in the law.

"As people find themselves in more and more difficult economic conditions, one of the ways they can use to retire is the reverse mortgage on their house," he said.

The problem, Konopnicki said, is that the lack of regulation often leaves borrowers in the dark about their obligations. That is not fair, he said.

He said no one would buy a car without knowing things like the interest rate and payment schedule.

With the requirements of the new law, Konopnicki said, "you know exactly what the terms are."

Boucek said the problems with the lack of regulations went beyond that. She said there is "inappropriate cross-selling of additional financial products."

For example, Boucek said, borrowers are often told they have to buy an annuity or some sort of investment, "which is not true."

"Seniors spend a significant portion of the proceeds they get from their mortgage for these unnecessary products," she said.

At the behest of the Arizona Bankers Association, though, state lawmakers did agree to loosen the rules a bit from what Konopnicki originally proposed. Under the version of the bill signed by Brewer, lenders will still be able to sell peril and flood insurance.

The new law also will allow variable interest rates. That caught the attention of Sen. Barbara Leff, R-Paradise Valley.

"Much of the reason people are losing their homes right now is because they never expected to happen what happened," she said, with costs increasing far more than anticipated.

Konopnicki agreed that he wouldn't sign a reverse mortgage with a variable rate. But he said they should be allowed as long as homeowners know what they're getting.