Consumer Protection In The News

John Cranshaw's stroke left him half paralyzed, while Ernest Minor's wife, Norma, was hit by what would become a fatal case of colon cancer.

Instead of enjoying their golden years, the two older men – who have never met – grew more worried as large medical bills started piling up in their Sacramento and Marysville homes a few years ago.

"We got way behind," Cranshaw said.

Long-time homeowners, they each accumulated equity during the housing boom. Mortgage brokers persuaded them to tap it to pay their bills.

Cranshaw, now 62, and Minor's late wife took out different loans to yield quick cash, though they failed to grasp the full consequences of the complex deals they signed.

While the deals gave the brokers and lenders hefty fees and commissions, the Cranshaw and Minor families later lost their homes after failing to make massive payments – Minor after he lost his wife.

After stories like those surfaced statewide, legislators and Gov. Arnold Schwarzeneggerdrafted and passed two new laws this year to counter allegedly widespread abusive lending practices.

Assembly Bills 329 and 260 aim to stop predatory lenders and unscrupulous mortgage brokers from using deceptive sales practices to take advantage of seniors seeking reverse mortgages and protect consumers of all ages shopping for more traditional mortgages. They targeted practices widely blamed for triggering the foreclosure crisis and subprime mortgage meltdown.

"California was the wild west of mortgage lending," said Pedro Morillas, a consumer protection lobbyist for the California Public Interest Research Group, or CalPIRG.

"With the largest housing market in the country and lax regulations for mortgage brokers, we were set up to take the biggest fall," Morillas said.

AB329 spells out tough new rules for reverse mortgages for seniors, like the one Minor's wife took out.

AB260 – whose provisions affect mortgages originated on or after July 1 – also offers new protections to less financially savvy consumers of all ages.

The latter aims to regulate and rein in an out-of-control subprime mortgage industry, says its author, Assemblyman Ted Lieu, D–Torrance.

It requires brokers to get clients the best loan for their situation, instead of steering them to a loan that gives brokers and lenders higher commissions and fees while boosting borrower costs.

That's what happened to Cranshaw. He requested and thought he received a 30-year traditional mortgage.

At the time, he was still recovering from his stroke, and his own wife had major surgery. What his broker gave him was a $270,000 adjustable rate mortgage for his south Sacramento home.

In two years, Cranshaw's payment swelled to $2,000 a month from $1,300 prior to the rate adjustment. "They were liars and straight-up crooks. They knew what they were doing," Cranshaw said.

He tried refinancing, but the prepayment penalty was too big. He lost his job – and then the house in late 2008.

His Cottontail Way home sold at foreclosure auction for $68,000. He now rents it from its owners for $1,250 a month.

Cranshaw's ordeal moved him to help CalPIRG's fight for stronger consumer laws.

The California Association of Mortgage Brokers applauded the aim of the new law, but opposed it, saying clauses prohibiting brokers from peddling "high-cost loans" don't define "high cost," a Senate bill analysis said.

The reverse mortgage bill was introduced by Assemblyman Mike Feuer, D-Los Angeles, and backed by the California Alliance for Retired Americans, the California Commission on Aging and the Center for Responsible Lending.

Feuer said that while such mortgages play a vital role in many seniors' retirements, other elderly Californians suffered real hardship because they didn't understand them.

"I decided it was important for seniors to be more informed, especially given the state of the economy and retirement investments dropping," Feuer said. "For some people, it's a very bad choice."

That was Minor's experience. His ordeal was highlighted in a Consumer Reports magazineprobe this fall.

Reverse mortgages are available to people 62 or older. When the Minors needed the money, Ernest wasn't 62, so it was in his wife's name only.

Such mortgages are like lines of credit against equity in the home, giving the homeowner monthly payouts or lump sums to boost incomes.

The full loan becomes due only when the borrower leaves the home, dies or stops paying property taxes and insurance.

When Minor's wife died in 2007, he owed more than $200,000 on the loan. The value of his home plunged to $130,000 amid the crash. He, his daughter Kristy, 31, and her 6-year-old daughter were evicted in October after failing to repay, Kristy Minor said.

Minor survives on Social Security, living in an RV and caring for his granddaughter. He's tired of talking about his misfortunes. Kristy Minor says he'd like to sue somebody, but he has no money.

AARP California, which also backed the bill, told legislators that its studies found many older Americans are pressured to get reverse mortgages they don't need.

Peter Bell, president of the 650-member National Reverse Mortgage Lenders Association, said the new state law is "a sensible solution" to an emerging problem that could be a model to other states.

"What's been done … is a good and better approach to protecting senior citizens," he said.

Bell said his industry grew concerned that seniors were getting reverse mortgages "to take care of immediate needs, but not considering all their needs in the longer term."

The new law requires seniors not only to get independent financial counseling, but review a financial checklist with advisers before any reverse mortgage takes effect. The checklist goes to the lender after it's reviewed and signed by a senior, ensuring they have seen the details.

The AARP and other seniors' groups have expressed concern that the rapid expansion of such mortgages was fueled by aggressive and deceptive marketing, including loans tied to annuities, life insurance or other products – which the AARP strongly discourages.