California Reverse Mortgage Laws

Section 1923: What Counts as a Reverse Mortgage

Before any other rule matters, a homeowner needs to know whether a loan is a "reverse mortgage" in the legal sense. Civil Code section 1923 defines it as "a nonrecourse loan secured by real property" that meets three tests.

In general, "nonrecourse" means the lender looks only to the home that secures the loan for repayment, not to the borrower's other savings or income. A "principal residence" is the home where a person mainly lives, as opposed to a vacation house or a rental.

The three tests are these:

• Cash based on the home. The loan provides cash advances based on the equity or value in the borrower's owner-occupied principal residence.
• No payments until due. No payment of principal or interest is required until the entire loan becomes due and payable.
• A licensed lender. The lender is licensed or chartered under the laws of California or of the United States.

The licensing test links to a practical step. The California Department of Financial Protection and Innovation explains that the California Residential Mortgage Lending Act requires anyone in the business of making or servicing residential mortgage loans in California to hold a license under that law. It also lists exempt entities, including banks and credit unions.

Section 1923.2: Protections Built Into the Loan

This is the longest section, and it carries most of the borrower protections. A short reminder of how the loan works in practice comes first. The Consumer Financial Protection Bureau explains for HECMs that interest and fees are added to the balance each month, so the amount owed grows. It also says the borrower must use the home as a principal residence, pay property taxes and homeowners insurance, and keep the house in good condition. The Federal Trade Commission says that generally the borrower, spouse, co-borrower or estate repays the loan when the borrower dies, sells the home or moves out. A fuller look at reverse mortgage loan balance growth follows the same thread.

Civil Code section 1923.2 then requires the following, subdivision by subdivision.

• (a) Early repayment. The borrower may prepay in whole or in part at any time without penalty. Charges that would have been due anyway when the loan came due do not count as a penalty.
• (b) and (c) Interest, costs and fees. The loan may carry a fixed rate, an adjustable rate or a mix, including compound interest. Interest may also depend on the home's value. Costs and fees may be charged at signing, over time or when the loan ends.
• (d) Steady advances. Where the loan pays periodic advances, a change in the interest rate may not reduce their amount or number.
• (e) Missed advances. This applies to a lender that fails to make required advances and does not cure the default after notice under the loan documents. That lender forfeits to the borrower three times the amount wrongly withheld, plus interest at the legal rate.
• (f) When the loan can come due. The statute names four events. The first is a sale or other transfer of title. The second is when all borrowers stop living in the home as a principal residence, subject to subdivision (g). The third is a fixed maturity date the parties agreed to. The fourth is an event named in the loan documents that jeopardizes the lender's security.
• (g) Absences and collection. Absences of up to 60 consecutive days do not make the loan due. Longer absences, if under one year, also do not, as long as the borrower first secured and protected the home as the loan documents specify and to the lender's satisfaction. The statute of limitations for written loan contracts starts on the date the loan becomes due. The loan agreement must prominently disclose any interest or fees charged after that date.
• (h) The deed of trust. Its first page must state, in 10-point boldface type, "This deed of trust secures a reverse mortgage loan."
• (i) Other products. A lender, or anyone else who takes part in originating the loan, may not require an applicant to buy an annuity as a condition of getting the loan. Originators also face limits on ties to other financial or insurance products and on referrals before closing or before the right to rescind expires. Customary items such as title and hazard insurance are allowed. Meeting the parallel federal originator rules counts as compliance with this subdivision.
• (j) Counselor list. Before taking a final application, the lender must give the borrower a list of at least 10 HUD-approved reverse mortgage counseling agencies. The counseling agency may not receive compensation, directly or indirectly, from the lender or anyone else involved in originating or servicing the loan or in selling annuities, investments, long-term care insurance or other financial or insurance products, apart from unrelated charitable support the subdivision allows.
• (k) Seven days and a certificate. The lender may not accept a final application or charge fees until seven days have passed since counseling. The lender must also have a counseling certification signed by the borrower and the counselor.
• (l) Another requirement. The lender may not make the loan without first complying with another Civil Code requirement this subdivision names, where it applies. For a brokered loan, the lender must ensure compliance.

The site's page on California reverse mortgage consumer protections explains these counseling steps in practice, along with the federal right to cancel. The CFPB describes a three-business-day right to cancel with most reverse mortgages.

These protections belong to the borrower by law, not by a lender's choice.

Sections 1923.3 and 1923.4: The Lien and a Home in a Trust

A family looking at the deed often wants to know who has a claim on the house. A "lien" is a legal claim against property that secures a debt. Under Civil Code section 1923.3, the reverse mortgage is a lien for all advances made and all interest accrued on them. That lien has priority over any lien filed or recorded after the reverse mortgage was recorded. In plain terms, a claim recorded later stands behind the reverse mortgage.

Section 1923.4 speaks to a home held in a trust, such as a living trust. Civil Code section 1923.4 says the property is still "deemed to be owner-occupied" when legal title is in the name of a trust, "provided that the occupant of the property is a beneficiary of that trust." Whether a particular trust fits that description is a question for an attorney who has read the trust document.

Section 1923.5: The Notice and the Worksheet

A grown child sitting in on a parent's first lender conversation may be surprised to see a page printed in large capital letters. That page comes from Civil Code section 1923.5. A lender may not take an application unless the applicant first received, before counseling, an "Important Notice to Reverse Mortgage Loan Applicant" in 16-point type or larger. The notice says, in part, "A REVERSE MORTGAGE IS A COMPLEX FINANCIAL TRANSACTION." It explains that the borrower will sign binding documents affecting them and their estate. It says the borrower must consult an independent counselor, and it notes that senior advocacy groups advise against using proceeds to buy an annuity.

The lender must also provide the "Reverse Mortgage Worksheet Guide," in 14-point type or larger, before the counseling meeting. If counseling comes first, the counseling agency provides it. The worksheet poses five essential questions to bring to counseling. They begin with what happens to others living in the home when the borrower dies or moves out. The worksheet states that the loan may become due if the borrower dies, moves, or is absent for 12 consecutive months. Its second question explains that a borrower can default by failing to keep up insurance, property taxes and home maintenance. The remaining questions continue in the statute. The worksheet is signed by the prospective borrower, and by the agency counselor when counseling is done in person, and returned to the lender with the counseling certification section 1923.2(k) requires. The application may not be approved until the lender has the signed worksheet, and the borrower gets a copy.

Sections 1923.6 and 1923.7: Disclosures and Remedies

What happens if a lender gets the paperwork wrong? These two short sections answer that in different ways.

Under Civil Code section 1923.6, a lender "shall be presumed to have satisfied any disclosure duty" in the chapter if it uses a disclosure statement in the same form the chapter provides. A presumption is a starting point the law assumes is true unless shown otherwise.

Civil Code section 1923.7 says no arrangement, transfer or lien is invalid solely because a lender failed to follow the chapter. However, it keeps "any other existing civil remedies provided by law." Civil remedies are the ways a court can make things right in a private lawsuit, such as an award of money. Which remedy might fit a specific loan is a question for an attorney. A HUD-approved counselor can help a borrower understand the loan papers.

Section 1923.9: What This Means If You Rely on State Benefits

For a homeowner who relies on a state assistance program, this section may matter most. A "means-tested program" is one where eligibility depends on a person's income or assets.

Civil Code section 1923.9 says reverse mortgage payments are treated "as proceeds from a loan and not as income" for California's means-tested programs. It also says undisbursed funds, meaning money available under the loan but not yet paid out, are treated as equity in the home rather than as resources or assets. The section reaches state programs including optional state supplements to federal SSI, low-income energy assistance, property tax relief, general assistance and medical assistance.

The section has its own limits. The protection applies only to the extent it does not conflict with federal law in a way that would cost federal funding. For medical assistance, it applies only to the extent it does not conflict with Title 19 of the federal Social Security Act. Federal programs follow their own rules. A county benefits office or a HUD-approved counselor can speak to a specific case.

Section 1923.10: Which Loans the Law Covers

The date a parent signed the loan decides whether this chapter applies. Civil Code section 1923.10 says the chapter "shall only apply to those reverse mortgage loans executed on or after January 1, 1998." "Executed" here refers to when the loan was signed. A loan signed before that date falls outside this chapter. An attorney can say which rules govern an older loan.

How the Federal HECM Rules Fit In

A HECM, or Home Equity Conversion Mortgage, is HUD's federally insured reverse mortgage program. A HECM made in California follows federal rules alongside this Civil Code chapter, including the federal age rule that the California reverse mortgage age requirements page explains. The site's page on HECM requirements lists HUD's rules in one place, and federal vs. California reverse mortgage rules sets the two side by side. HUD's HECM program page describes the federal program, and federal rules limit the origination fee, which the lender discloses.