BILL NUMBER: AB 489 CHAPTERED
BILL TEXT
CHAPTER 732
FILED WITH SECRETARY OF STATE OCTOBER 11, 2001
APPROVED BY GOVERNOR OCTOBER 10, 2001
PASSED THE ASSEMBLY SEPTEMBER 12, 2001
PASSED THE SENATE SEPTEMBER 10, 2001
AMENDED IN SENATE SEPTEMBER 6, 2001
AMENDED IN SENATE SEPTEMBER 4, 2001
AMENDED IN SENATE JULY 12, 2001
AMENDED IN SENATE JULY 10, 2001
AMENDED IN SENATE JUNE 21, 2001
AMENDED IN ASSEMBLY MAY 30, 2001
AMENDED IN ASSEMBLY MAY 1, 2001
AMENDED IN ASSEMBLY APRIL 19, 2001
AMENDED IN ASSEMBLY APRIL 5, 2001
INTRODUCED BY Assembly Member Migden
(Principal coauthor: Senator Machado)
(Coauthor: Senator Murray)
FEBRUARY 21, 2001
An act to add Division 1.6 (commencing with Section 4970) to the
Financial Code, relating to lending.
LEGISLATIVE COUNSEL'S DIGEST
AB 489, Migden. Loans secured by real property.
Existing law provides for regulation of banks and savings
associations by the Department of Financial Institutions. Existing
law provides for regulation of real estate brokers by the Department
of Real Estate. Existing law provides for regulation of finance
lenders and residential mortgage lenders by the Department of
Corporations. Existing law provides that willful violations of
provisions governing savings associations, real estate brokers, and
residential mortgage lenders are crimes.
This bill would impose various requirements on consumer loans
secured by specified real property, defined as "covered loans." The
bill would prohibit various acts in making covered loans, including
the following: failing to consider the financial ability of a
borrower to repay the loan, financing specified types of credit
insurance into a consumer loan transaction, recommending or
encouraging a consumer to default on an existing consumer loan in
order to solicit or make a covered loan that refinances the consumer
loan, and making a covered loan without providing the consumer a
specified disclosure. The bill would provide that a violation of its
provisions would be subject to a civil penalty.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Division 1.6 (commencing with Section 4970) is added to
the Financial Code, to read:
DIVISION 1.6. ____
CHAPTER 1. GENERAL PROVISIONS AND DEFINITIONS
4970. For purposes of this division:
(a) "Annual percentage rate" means the annual percentage rate for
the loan calculated according to the provisions of the federal Truth
in Lending Act and the regulations adopted thereunder by the Federal
Reserve Board.
(b) (1) "Covered loan" means a consumer loan in which the original
principal balance of the loan does not exceed two hundred fifty
thousand dollars ($250,000) in the case of a mortgage or deed of
trust, and where one of the following conditions are met:
(A) For a mortgage or deed of trust, the annual percentage rate at
consummation of the transaction will exceed by more than eight
percentage points the yield on Treasury securities having comparable
periods of maturity on the 15th day of the month immediately
preceding the month in which the application for the extension of
credit is received by the creditor.
(B) The total points and fees payable by the consumer at or before
closing for a mortgage or deed of trust will exceed 6 percent of the
total loan amount.
(2) The dollar amount specified in paragraph (1) shall be adjusted
every five years in accordance with the California Consumer Price
Index.
(c) "Points and fees" shall include the following:
(1) All items required to be disclosed as finance charges under
Sections 226.4(a) and 226.4(b) of Title 12 of the Code of Federal
Regulations, including the Official Staff Commentary, as amended from
time to time, except interest.
(2) All compensation and fees paid to mortgage brokers in
connection with the loan transaction.
(3) All items listed in Section 226.4(c)(7) of Title 12 of the
Code of Federal Regulations, only if the person originating the
covered loan receives direct compensation in connection with the
charge.
(d) "Consumer loan" means a consumer credit transaction that is
secured by real property located in this state used, or intended to
be used or occupied, as the principal dwelling of the consumer that
is improved by a one-to-four residential unit. "Consumer loan" does
not include a reverse mortgage, an open line of credit as defined in
Part 226 of Title 12 of the Code of Federal Regulations (Regulation
Z), or a consumer credit transaction that is secured by rental
property or second homes. "Consumer loan" does not include a bridge
loan with a maturity of less than one year if the purpose of the loan
is a bridge loan connected with the acquisition or construction of a
dwelling intended to become the consumer's principal dwelling.
(e) "Original principal balance" means the total initial amount
the consumer is obligated to repay on the loan.
(f) "Licensing agency" shall mean the Department of Real Estate
for licensed real estate brokers, the Department of Corporations for
licensed residential mortgage lenders and licensed finance lenders
and brokers, and the Department of Financial Institutions for
commercial and industrial banks and savings associations and credit
unions organized in this state.
(g) "Licensed person" means a real estate broker licensed under
the Real Estate Law (Part 1 (commencing with Section 10000) of
Division 4 of the Business and Professions Code), a finance lender or
broker licensed under the California Finance Lenders Law (Division 9
(commencing with Section 22000)), a residential mortgage lender
licensed under the California Residential Mortgage Lending Act
(Division 20 (commencing with Section 50000)), a commercial or
industrial bank organized under the Banking Law (Division 1
(commencing with Section 99)), a savings association organized under
the Savings Association Law (Division 2 (commencing with Section
5000)), and a credit union organized under the California Credit
Union Law (Division 5 (commencing with Section 14000)). Nothing in
this division shall be construed to prevent any enforcement by a
governmental entity against any person who originates a loan and who
is exempt or excluded from licensure by all of the licensing
agencies, based on a violation of any provision of this division.
Nothing in this division shall be construed to prevent the Department
of Real Estate from enforcing this division against a licensed
salesperson employed by a licensed real estate broker as if that
salesperson were a licensed person under this division. A licensed
person includes any person engaged in the practice of consumer
lending, as defined in this division, for which a license is required
under any other provision of law, but whose license is invalid,
suspended or revoked, or where no license has been obtained.
(h) "Originate" means to arrange, negotiate, or make a consumer
loan.
(i) "Servicer" has the same meaning provided in Section 6 (i)(2)
of the Real Estate Settlement Procedures Act of 1974.
CHAPTER 2. PROHIBITED ACTS
4973. The following are prohibited acts and limitations for
covered loans:
(a) (1) A covered loan shall not include a prepayment fee or
penalty after the first 36 months after the date of consummation of
the loan.
(2) A covered loan may include a prepayment fee or penalty up to
the first 36 months after the date of consummation of the loan if:
(A) The person who originates the covered loan has also offered
the consumer a choice of another product without a prepayment fee or
penalty.
(B) The person who originates the covered loan has disclosed in
writing to the consumer at least three business days prior to loan
consummation the terms of the prepayment fee or penalty to the
consumer for accepting a covered loan with the prepayment penalty and
the rates, points, and fees that would be available to the consumer
for accepting a covered loan without a prepayment penalty.
(C) The person who originates the covered loan has limited the
amount of the prepayment fee or penalty to an amount not to exceed
the payment of six months' advance interest, at the contract rate of
interest then in effect, on the amount prepaid in any 12-month period
in excess of 20 percent of the original principal amount.
(D) A covered loan will not impose the prepayment fee or penalty
if the covered loan is accelerated as a result of default.
(E) The person who originates the covered loan will not finance a
prepayment penalty through a new loan that is originated by the same
person.
(b) (1) A covered loan with a term of 5 years or less may not
provide at origination for a payment schedule with regular periodic
payments that when aggregated do not fully amortize the principal
balance as of the maturity date of the loan.
(2) For a payment schedule that is adjusted to account for the
seasonal or irregular income of the consumer, the total installments
in any year shall not exceed the amount of one year's worth of
payments on the loan. This prohibition does not apply to a bridge
loan. For purposes of this paragraph, "bridge loan" means a loan
with a maturity of less than 18 months that only requires payments of
interest until the time when the entire unpaid balance is due and
payable.
(c) A covered loan shall not contain a provision for negative
amortization such that the payment schedule for regular monthly
payments causes the principal balance to increase, unless the covered
loan is a first mortgage and the licensed person discloses to the
consumer that the loan contains a negative amortization provision
that may add principal to the balance of the loan.
(d) A covered loan shall not include terms under which periodic
payments required under the loan are consolidated and paid in advance
from the loan proceeds.
(e) A covered loan shall not contain a provision that increases
the interest rate as a result of a default. This provision does not
apply to interest rate changes in a variable rate loan otherwise
consistent with the provisions of the loan documents, provided the
change in the interest rate is not triggered by the event of default
or the acceleration for the indebtedness.
(f) (1) A person who originates covered loans shall not make or
arrange a covered loan unless at the time the loan is consummated,
the person reasonably believes the consumer, or consumers, when
considered collectively in the case of multiple consumers, will be
able to make the scheduled payments to repay the obligation based
upon a consideration of their current and expected income, current
obligations, employment status, and other financial resources, other
than the consumer's equity in the dwelling that secures repayment of
the loan. In the case of a covered loan that is structured to
increase to a specific designated rate, stated as a number or
formula, at a specific predetermined date not exceeding 37 months
from the date of application, this evaluation shall be based upon the
fully indexed rate of the loan calculated at the time of
application.
The consumer shall be presumed to be able to make the scheduled
payments to repay the obligation if, at the time the loan is
consummated, the consumer's total monthly debts, including amounts
owed under the loan, do not exceed 55 percent of the consumer's
monthly gross income, as verified by the credit application, the
consumer's financial statement, a credit report, financial
information provided to the person originating the loan by or on
behalf of the consumer, or any other reasonable means.
(2) No presumption of inability to make the scheduled payments to
repay the obligation shall arise solely from the fact that at the
time the loan is consummated, the consumer's total monthly debts,
including amounts owed under the loan, exceed 55 percent of the
consumer's monthly gross income.
(3) In the case of a stated income loan, the reasonable belief
requirement in paragraph (1) shall apply, however, for stated income
loans that belief may be based on the income stated by the consumer,
and other information in the possession of the person originating the
loan after the solicitation of all information that the person
customarily solicits in connection with loans of this type. A person
shall not knowingly or willfully originate a covered loan as a
stated income loan with the intent, or effect, of evading the
provisions of this subdivision.
(g) A person who originates a covered loan shall not pay a
contractor under a home-improvement contract from the proceeds of a
covered loan other than by an instrument payable to the consumer or
jointly to the consumer and the contractor or, at the election of the
consumer, to a third-party escrow agent for the benefit of the
contractor in accordance with terms and conditions established in a
written escrow agreement signed by the consumer, the person who
originates a covered loan, and the contractor prior to the
disbursement of funds. No payments, other than progress payments for
home-improvement work that the consumer certifies is completed,
shall be made to an escrow account or jointly to the consumer and the
contractor unless the person who originates the loan is presented
with a signed and dated completion certificate by the consumer
showing that the home-improvement contract was completed to the
satisfaction of the consumer.
(h) It is unlawful for a person who originates a covered loan to
recommend or encourage a consumer to default on an existing consumer
loan or other debt in connection with the solicitation or making of a
covered loan that refinances all or any portion of the existing
consumer loan or debt.
(i) A covered loan shall not contain a call provision that permits
the lender, in its sole discretion, to accelerate the indebtedness.
This prohibition does not apply if repayment of the loan has been
accelerated in accordance with the terms of the loan documents (1) as
a result of the consumer's default, (2) pursuant to a due-on-sale
provision, or (3) due to fraud or material misrepresentation by a
consumer in connection with the loan or the value of the security for
the loan. A licensed person shall not refinance or arrange for the
refinancing of a consumer loan such that the new loan is a covered
loan that is made for the purpose of refinancing, debt consolidation
or cash out, that does not result in an identifiable benefit to the
consumer, considering the consumer's stated purpose for seeking the
loan, fees, interest rates, finance charges, and points.
(j) (1) A covered loan shall not be made unless the following
disclosure, written in 12-point font or larger, has been provided to
the consumer no later than three business days prior to signing of
the loan documents of the transaction:
CONSUMER CAUTION AND HOME OWNERSHIP COUNSELING NOTICE
If you obtain this loan, the lender will have a mortgage on your
home. You could lose your home, and any money you have put into it,
if you do not meet your obligations under the loan.
Mortgage loan rates and closing costs and fees vary based on many
other factors, including your particular credit and financial
circumstances, your earnings history, the loan-to-value requested,
and the type of property that will secure your loan. Higher rates
and fees may be justified depending on the individual circumstances
of a particular consumer's application. You should shop around and
compare loan rates and fees.
This particular loan may have a higher rate and total points and
fees than other mortgage loans and is, or may be, subject to the
additional disclosure and substantive protections under Division 1.6
(commencing with Section 4970 of the Financial Code. You should
consider consulting a qualified independent credit counselor or other
experienced financial adviser regarding the rate, fees, and
provisions of this mortgage loan before you proceed. For information
on contacting a qualified credit counselor, ask your lender or call
the United States Department of Housing and Urban Development's
counseling hotline at 1-888-466-3487 or go to www.hud.gov/fha/sfh/hcc
for a list of counselors.
You are not required to complete any loan agreement merely because
you have received these disclosures or have signed a loan
application.
If you proceed with this mortgage loan, you should also remember
that you may face serious financial risks if you use this loan to pay
off credit card debts and other debts in connection with this
transaction and then subsequently incur significant new credit card
charges or other debts. If you continue to accumulate debt after
this loan is closed and then experience financial difficulties, you
could lose your home and any equity you have in it if you do not meet
your mortgage loan obligations.
Property taxes and homeowner's insurance are your responsibility.
Not all lenders provide escrow services for these payments. You
should ask your lender about these services.
Your payments on existing debts contribute to your credit ratings.
You should not accept any advice to ignore your regular payments to
your existing creditors.
(2) It shall be a rebuttable presumption that a licensed person
has met its obligation to provide this disclosure if the consumer
provides the licensed person with a signed acknowledgment of receipt
of a copy of the notice set forth in paragraph (1).
(m) (1) A person who originates a covered loan shall not steer,
counsel, or direct any prospective consumer to accept a loan product
with a risk grade less favorable than the risk grade that the
consumer would qualify for based on that person's then current
underwriting guidelines, prudently applied, considering the
information available to that person, including the information
provided by the consumer.
A person shall not be deemed to have violated this section if the
risk grade determination applied to a consumer is reasonably based on
the person's underwriting guidelines if it is an appropriate risk
grade category for which the consumer qualifies with the person.
(2) If a broker originates a covered loan, the broker shall not
steer, counsel, or direct any prospective consumer to accept a loan
product at a higher cost than that for which the consumer could
qualify based on the loan products offered by the persons with whom
the broker regularly does business.
(n) A person who originates a covered loan shall not avoid, or
attempt to avoid, the application of this division by doing the
following:
(1) Structuring a loan transaction as an open-end credit plan for
the purpose of evading the provisions of this division when the loan
would have been a covered loan if the loan had been structured as a
closed end loan.
(2) Dividing any loan transaction into separate parts for the
purpose of evading the provisions of this division.
(o) A person who originates a covered loan shall not act in any
manner, whether specifically prohibited by this section or of a
different character, that constitutes fraud.
CHAPTER 3. ENFORCEMENT
4974. (a) Any compliance failure that was not willful or
intentional and resulted from a bona fide error, that occurred
notwithstanding the maintenance of procedures reasonably adopted to
avoid those errors, including, but not limited to, those involving
clerical, calculation, computer malfunction and programming, and
printing errors shall be corrected no later than 45 days after
receipt of the complaint or discovery of the error. A person who
originates a covered loan shall not be administratively, civilly, or
criminally liable for a bona fide error corrected pursuant to this
section. An error in legal judgment is not a bona fide error under
this section.
(b) If a person who originates covered loans makes a loan where
the person knew of and showed reckless disregard for a violation of
this division by a broker, the person and broker shall be jointly and
severally liable for all damages awarded under this division with
respect to the broker's unlawful conduct.
This section does not impose or transfer liability for a breach of
the broker's fiduciary duty.
4975. (a) (1) Any licensed person who violates any provision of
Section 4973, 4979.6, or 4979.7 shall be deemed to have violated that
person's licensing law.
(2) After any action under Section 4978.5 resulting in a
conviction, the licensing agency may bring a proceeding to suspend
the license of the licensed person for not less than six months and
not more than three years.
(b) After any action under Section 4978.5 resulting in a second or
subsequent conviction, the licensing agency may bring a proceeding
to permanently revoke the license of the licensed person or impose
any lesser licensed sanction for at least three years.
(c) A licensing agency may exercise any and all authority and
powers available to it under any other provisions of law, to
administer and enforce this division. A licensing agency may charge
and collect reasonable costs for enforcing this division. However,
nothing in this subdivision shall authorize the imposition or
collection of charges or fees that duplicate charges or fees
authorized under any other provision of law.
(d) Nothing in this section shall be construed to impair or impede
a licensing agency's authority under any other provision of law.
4977. (a) A licensing agency may, after appropriate notice and
opportunity for hearing, by order levy administrative penalties
against a person who violates any provision of this division, and the
person shall be liable for administrative penalties of not more than
two thousand five hundred dollars ($2,500) for each violation.
Except for licensing agencies exempt from the provisions of the
Administrative Procedure Act, any hearing shall be held in accordance
with the Administrative Procedure Act (Chapter 5 (commencing with
Section 11500) of Part 1 of Division 3 of Title 2 of the Government
Code), and the licensing agency shall have all the powers granted
under that act.
(b) Any person who willfully and knowingly violates any provision
of this division shall be liable for a civil penalty of not more than
twenty-five thousand dollars ($25,000) for each violation which
shall be assessed and recovered in a civil action brought in the name
of the people of the State of California by the licensing agency in
any court of competent jurisdiction.
(c) A licensing agency may exercise any and all authority and
powers available to it under any other provisions of law, to
administer and enforce this division, including, but not limited to,
investigating and examining the licensed person's books and records,
and charging and collecting the reasonable costs for these
activities. The licensing agency shall not charge a licensed person
twice for the same service. Any civil, criminal, and administrative
authority and remedies available to the licensing agency pursuant to
its licensing law may be sought and employed in any combination
deemed advisable by the licensing agency to enforce the provisions of
this division.
(d) If the licensing agency determines that it is in the public
interest, the licensing agency may include, in any action for
penalties authorized by subdivision (b), a claim for relief in
addition to the penalties, including a claim for restitution or
disgorgement, and the court shall have jurisdiction to award the
additional relief.
(e) Nothing in this section shall be construed to impair or impede
the Attorney General from representing a licensing agency in
bringing an action to enforce this division at the request and on
behalf of the licensing agency.
(f) In any action brought by the licensing agency, or the Attorney
General acting at the request and at the behest of the licensing
agency, under this division in which a judgment against a person is
rendered, the licensing agency or the Attorney General shall be
entitled to recover costs which, in the discretion of the court, may
include an amount representing reasonable attorney's fees and
investigative expenses for services rendered for deposit in the
appropriate fund of that licensing agency.
(g) The amounts collected under subdivisions (a) and (b) shall be
deposited in the appropriate fund of the licensing agency to be used
by that licensing agency, subject to appropriation by the
Legislature, for the purposes of education and enforcement in
connection with abusive lending practices.
4978. (a) A person who fails to comply with the provisions of
this division is civilly liable to the consumer in an amount equal to
any actual damages suffered by the consumer, plus attorneys fees and
costs. For a willful and knowing violation of this division, the
person shall be liable to the consumer in the amount of fifteen
thousand dollars ($15,000) or the consumers actual damages, whichever
is greater, plus attorneys fees and costs.
(b) A provision in a covered loan that violates this division is
unenforceable. A court in which any action is brought by, or on
behalf of, an aggrieved consumer for relief may issue an order or
injunction to reform the terms of the covered loan to conform to the
provisions of this division. The court may, in addition to any other
remedy, award punitive damages to the consumer upon a finding that
such damages are warranted pursuant to Section 3294 of the Civil
Code.
(c) Nothing in this section is intended, nor shall be construed,
to abrogate existing common law provisions prohibiting double
recovery of damages.
4978.6. A person who originates covered loans shall inform any
employee, who originates covered loans on behalf of the person, of
the administrative, civil, and criminal penalties for a violation of
this division.
4979. Upon request, a person who originates a covered loan shall
provide the licensing agency or the consumer, at no cost,
documentation regarding his or her loan that clearly demonstrates
whether any loan is a covered loan. This documentation shall
include, but not be limited to, full disclosure of the original
principal balance, the annual percentage rate, and the total points
and fees, as defined in Section 4971.
4979.5. (a) A person who provides brokerage services to a
borrower in a covered loan transaction by soliciting lenders or
otherwise negotiating a consumer loan secured by real property, is
the fiduciary of the consumer, and any violation of the person's
fiduciary duties shall be a violation of this section. A broker who
arranges a covered loan owes this fiduciary duty to the consumer
regardless of who else the broker may be acting as an agent for in
the course of the loan transaction.
(b) Except for a broker or a person who provides brokerage
services, no licensed person or subsequent assignee shall have
administrative, civil, or criminal liability for a violation of this
section.
4979.6. A person who originates a covered loan shall not make a
covered loan that finances points and fees in excess of one thousand
dollars ($1,000) or 6 percent of the original principal balance,
exclusive of points and fees, whichever is greater.
4979.7. On and after July 1, 2002, a person who originates a
consumer loan shall not finance, directly or indirectly, into a
consumer loan transaction or finance to the same borrower within 30
days of a consumer loan transaction any credit life, credit
disability, credit property, or credit unemployment insurance
premiums, or any debt cancellation or suspension agreement or
contract fees, provided that insurance premiums, debt cancellation,
or suspension fees calculated and paid on a monthly basis shall not
be considered financed by the person originating the loan. For
purposes of this section, credit insurance does not include a
contract issued by a government agency or private mortgage insurance
company to insure the lender against loss caused by a mortgagor's
default.
4979.8. The provisions of this division shall not impose
liability on an assignee that is a holder in due course. The
provisions of this division shall not apply to persons chartered by
Congress to engage in secondary mortgage market transactions.
SEC. 3. The provisions of this act shall apply to a consumer loan
applied for on or after July 1, 2002.
SEC. 4. The provisions of this act are severable. If any
provision of this act or its application is held invalid, that
invalidity shall not affect other provisions or applications that can
be given effect without the invalid provision or application.
SEC. 5. No reimbursement is required by this act pursuant to
Section 6 of Article XIIIB of the California Constitution because the
only costs that may be incurred by a local agency or school district
will be incurred because this act creates a new crime or infraction,
eliminates a crime or infraction, or changes the penalty for a crime
or infraction, within the
meaning of Section 17556 of the Government Code, or changes the
definition of a crime within the meaning of Section 6 of Article
XIIIB of the California Constitution.