Federal vs. California Reverse Mortgage Rules

Which Loans Each Set of Rules Covers

Which rules apply turns first on what kind of loan it is. The federal HECM rules in 12 U.S.C. § 1715z-20 cover the Home Equity Conversion Mortgage, which HUD describes as "the only reverse mortgage insured by the U.S. Federal Government," available only through an FHA-approved lender. Separately, Regulation Z at 12 C.F.R. § 1026.33 sets disclosure rules for reverse mortgage transactions generally, including a table of "total annual loan cost rates" and a notice that signing an application does not obligate the consumer to finish the loan.

California's chapter reaches further in one way. Civil Code section 1923 defines a reverse mortgage as a nonrecourse loan on an owner-occupied principal residence, requiring no payment of principal or interest until the loan is due, made by a lender licensed or chartered under California or federal law. Civil Code section 1923.10 says the chapter applies only to loans executed on or after January 1, 1998.

In practice, a HECM in California lives under both sets of rules at the same time. A non-HECM loan, sometimes called a jumbo or proprietary reverse mortgage, falls under California's chapter and Regulation Z, but not the HECM statute. On licensing, the California Department of Financial Protection and Innovation explains that anyone in the business of making or servicing residential mortgage loans in California generally needs a license, with listed exemptions such as banks and federal credit unions.

Counseling: What California Requires Beyond the Federal Steps

Counseling is the clearest place where California asks for more. Under 12 U.S.C. § 1715z-20(d)(2)(B), a HECM borrower must receive counseling from an independent third party not associated with or paid by anyone originating the loan, funding it, or selling annuities, investments, long-term care insurance or other financial products. HUD's rule at 24 C.F.R. § 206.41(a) adds that at first contact, the lender gives a list of approved HECM counselors, and that the borrower, any non-borrowing spouse and any non-borrowing owner must receive counseling.

California then layers on three steps:

• A minimum list. Before accepting a final, complete application, the lender provides a list of at least 10 HUD-approved counseling agencies, which may not be paid by the lender or anyone involved in originating or servicing the loan or in selling related products (Civil Code § 1923.2(j)).
• A seven-day wait. The lender may not accept a final, complete application or charge fees until seven days after counseling, and must first receive a certification, signed by the borrower and counselor, that counseling took place, in person unless the applicant chose otherwise (Civil Code § 1923.2(k)).
• A notice and worksheet. Before counseling, the borrower receives a notice in 16-point type or larger that includes, "A REVERSE MORTGAGE IS A COMPLEX FINANCIAL TRANSACTION," along with a worksheet guide of questions to bring to the session (Civil Code § 1923.5).

For a family, this means counseling comes before the application is final, and at least a week passes before the lender can take it forward.

When the Loan Comes Due and What a Hospital Stay Can Mean

A spouse or adult child may ask this question with a hospital stay or a move to assisted living in mind. Before getting to absences, it helps to recall how the loan works. The CFPB explains that interest and fees are added to the balance each month, so the amount owed grows, and that borrowers must pay property taxes and homeowners insurance, live in the home as a principal residence and keep it in good condition. The CFPB also notes that a HECM must be paid off when the last surviving borrower or Eligible Non-Borrowing Spouse dies, sells or no longer lives there.

Under 24 C.F.R. § 206.27(c), a HECM is due when a borrower dies and no surviving borrower lives there (subject to a deferral for an Eligible Non-Borrowing Spouse), or when title is fully conveyed. With HUD's approval, it is also due if the home stops being any borrower's principal residence, taxes and other property charges go unpaid, or another obligation is not performed.

Civil Code section 1923.2(f) says the loan may become due on sale or transfer, all borrowers leaving the home, a fixed maturity date, or an event in the loan documents that jeopardizes the lender's security.

What the deferral means for a spouse who is not on the loan

Sometimes only one spouse signs the loan. The federal rule quoted above includes a deferral for an Eligible Non-Borrowing Spouse. In plain terms, when the borrowing spouse dies, the loan does not automatically come due right away for that surviving spouse; the due date is put off, as long as the deferral's conditions continue to be met. HUD's counseling rule also brings non-borrowing spouses into the counseling session. The details have their own page on non-borrowing spouses.

Absences from the home

On absences, the federal rule makes a HECM due, with HUD approval, when a borrower is away more than 12 consecutive months because of physical or mental illness and no other borrower lives there. California says absences up to 60 consecutive days do not make the loan due (Civil Code § 1923.2(g)(1)). Absences beyond 60 days but under one year do not either, if the borrower has taken prior action that secures and protects the home in a manner satisfactory to the lender, as the loan documents specify (Civil Code § 1923.2(g)(2)). In everyday terms, California's rule puts more weight on what the borrower arranges for the house before a longer stay away.

Annuities and Other Products: Why This Rule Exists

This rule exists because some sales pitches pair a reverse mortgage with an investment. The FTC warns that a salesperson may press a borrower to buy an annuity or long-term care insurance, and that a borrower does not have to buy any financial product to get a reverse mortgage.

Federally, 12 U.S.C. § 1715z-20(n) requires anyone originating a HECM either to stay out of other financial or insurance activity or to show HUD firewalls ensuring originators have no involvement with, or incentive to offer, other products. Section 1715z-20(o) bars requiring an insurance, annuity or similar product as a condition, except customary products such as title, hazard and flood insurance.

California's Civil Code section 1923.2(i) bars requiring an annuity purchase and generally bars referring the borrower for an annuity or other financial product before closing or before the right to rescind expires, while still allowing title, hazard, flood and similar customary insurance. Under section 1923.2(i)(3), a lender that follows those federal subsections, and HUD's rules and guidance under them, is deemed to comply with California's rule, even on a loan that is not a HECM. For the homeowner, either way, the loan cannot hinge on buying something else.

Prepayment, the Lien, Nonrecourse and Cancellation

Several protections appear in both sets of rules, worded a little differently.

Prepayment. A borrower may repay in full or in part at any time without charge or penalty under 24 C.F.R. § 206.209. Civil Code section 1923.2(a) says the same, adding that charges that would have been due anyway when the loan came due are not a penalty.

The lien. A lien is the lender's legal claim against the home. Under 24 C.F.R. § 206.8(a), the full amount secured by a HECM, including later advances for interest, property charges and insurance premiums, has the same priority as if disbursed on the first disbursement date, and this "shall apply notwithstanding any State constitution, law, or regulation." California's section 1923.3 makes the lien cover all advances and accrued interest, with priority over liens recorded later. What this means for a homeowner: the growing balance stays tied to the house, and the reverse mortgage stands ahead of claims recorded against the home afterward.

Nonrecourse. Under 24 C.F.R. § 206.27(b)(8), a HECM borrower has no personal liability for the balance, and California defines every covered reverse mortgage as nonrecourse (Civil Code § 1923). The FTC puts it plainly: the borrower or estate cannot owe more than the home's value when the loan becomes due and the home is sold. That limit does not remove the borrower's duties; the loan can still come due as described above.

Right to cancel. The FTC states that with most reverse mortgages, a borrower has at least three business days after closing to cancel for any reason, without penalty, known as rescission.

Where the Two Meet

Seen together, the two sets of rules mostly stack rather than compete. For a HECM in California, the lender must satisfy both; for a non-HECM loan, California's chapter and Regulation Z still apply.

California adds the longer counseling list, the seven-day wait and certification, the notice and worksheet, and the detailed 60-day absence rule. The rules match on no prepayment penalty and on nonrecourse. Two of the texts compared here say how they interact: HUD's lien-priority rule applies notwithstanding state law, and section 1923.2(i)(3) treats federal compliance on products as California compliance.

One California rule, section 1923.9, has no counterpart among the federal rules compared here; federally, the HECM counselor must disclose that a HECM may affect eligibility for assistance under federal and state programs (12 U.S.C. § 1715z-20(f)(4)). Means-tested programs are public benefits whose eligibility depends on income or assets. To the extent it does not conflict with federal law in a way that costs federal funding, Civil Code section 1923.9 treats reverse mortgage payments as loan proceeds, not income, for those state programs, and treats undisbursed funds as home equity, not assets. It lists programs including optional state supplements to SSI, low-income energy assistance, property tax relief, general assistance, and medical assistance to the extent consistent with Title 19 of the Social Security Act. Put simply, for those state programs, money received from the loan is generally counted as borrowed money rather than earnings, and money not yet drawn is counted as part of the house's value.

How the loan itself works is laid out in the California reverse mortgage guide, and common misunderstandings are checked against HUD rules in reverse mortgage myths.

Questions Worth Bringing to a Counselor or Lender

A HUD-approved counselor is independent of the lender, which makes the session a natural place to start. The CFPB suggests telling the counselor about any earlier talk with a lender, including whether anything else was offered. Questions a family can bring:

• Is this loan a HECM, or a loan covered only by California's chapter and Regulation Z?
• When did counseling happen, and when does the seven-day period end?
• Which events would make this loan come due, and what do the loan documents say jeopardizes the lender's security?
• If a hospital or care stay runs past 60 days, what prior action do the loan documents require?
• If one spouse is not on the loan, how does the deferral apply to that spouse?
• Is any annuity, investment or insurance product being suggested alongside the loan?
• How would the payments be treated for any state benefit program the household uses?

The California Department of Real Estate also cautions seniors never to sign a home loan agreement they do not understand, have not read, or that contains blank spaces.