BILL NUMBER: AB 1830 AMENDED
BILL TEXT
AMENDED IN SENATE JUNE 25, 2008
AMENDED IN SENATE JUNE 12, 2008
AMENDED IN ASSEMBLY MAY 28, 2008
AMENDED IN ASSEMBLY MAY 23, 2008
AMENDED IN ASSEMBLY APRIL 1, 2008
INTRODUCED BY Assembly Members Lieu, Bass, and Wolk
(Principal coauthors: Assembly Members Galgiani, Nunez, and
Ruskin)
(Coauthors: Assembly Members Arambula, Beall, Berg, Brownley,
Caballero, Carter, Coto, Davis, De Leon, DeSaulnier, Dymally, Eng,
Feuer, Hancock, Hayashi, Huffman, Jones, Karnette, Krekorian, Laird,
Leno, Levine, Ma, Mendoza, Mullin, Nava, Price, Salas, Saldana,
Solorio, Swanson, and Torrico)
JANUARY 23, 2008
An act to add Division 1.9 (commencing with Section 4995)
to the Financial Code, relating to loans. An act to
amend Sections 10177 and 10245 of, and to add and repeal Section
10242.7 of, the Business and Professions Code, and to amend Section
50505 of, to add Sections 1242, 14961, and 22346 to, and to add and
repeal Sections 1243, 14962, 22347, and 50334 of, the Financial Code,
relating to lending.
LEGISLATIVE COUNSEL'S DIGEST
AB 1830, as amended, Lieu. Subprime home loans.
Lending.
(1) The Real Estate Law provides for the licensure and regulation
of real estate brokers and salespersons by the Real Estate
Commissioner. Existing law authorizes the commissioner to suspend or
revoke the license of a real estate licensee or corporation, or to
deny the issuance of a license to an applicant or corporation, for
specified violations.
This bill would further authorize the commissioner to suspend or
revoke those licenses, or to deny issuance of those licenses, upon a
violation of specified federal lending laws or regulations.
(2) Existing law imposes certain limitations and prohibitions on
licensed persons, as defined, with respect to the making of a covered
loan, defined as a consumer loan in which the original principal
balance of the loan does not exceed the most current conforming loan
limit for a single-family first mortgage loan established by the
Federal National Mortgage Association in the case of a mortgage or
deed of trust, and as specified. Existing law does not regulate or
define the term "higher-priced mortgage loan."
This bill would, until specified federal regulations become
operative, define the term "higher-priced mortgage loan" to mean a
consumer credit transaction that is secured by the consumer's
principal dwelling in which the annual percentage rate at
consummation will exceed the yield on comparable Treasury securities
by 3 or more percentage points for loans secured by a first lien on a
dwelling, or by 5 or more percentage points for loans secured by a
subordinate lien on a dwelling and would allow a higher-priced
mortgage loan to include prepayment penalties if certain conditions
are met.
(3) Existing law imposes certain limitations and prohibitions on
licensed persons, including real estate brokers, finance lenders,
residential mortgage lenders, and financial institutions, with
respect to consumer loans and covered loans.
This bill would provide that a violation of specified federal
lending laws or regulations by a licensed person is also a violation
of the person's licensing law. Because a violation of the bill's
provisions by certain licensed persons may be punished as crimes
under the person's licensing law, the bill would impose a
state-mandated local program.
The California Constitution requires the state to reimburse local
agencies and school districts for certain costs mandated by the
state. Statutory provisions establish procedures for making that
reimbursement.
This bill would provide that no reimbursement is required by this
act for a specified reason.
Existing law imposes certain limitations and prohibitions on
licensed persons, including real estate brokers, finance lenders,
residential mortgage lenders, and financial institutions, with
respect to consumer loans and covered loans.
This bill would establish "subprime home loans," as defined, as a
new category of regulated loans. The bill would prohibit a subprime
home loan from including prepayment penalties, except under specified
conditions, and from including a provision for negative
amortization. The bill would prohibit a licensed person, as defined,
from making a subprime home loan unless at the time the loan is
consummated the licensed person reasonably believes the consumer will
be able to make the scheduled payments, including taxes and
insurance. The bill would, among other things, prohibit a mortgage
broker, as defined, who originates subprime home loans from receiving
a yield spread premium unless specified disclosures are provided to
the borrower and certain other conditions are satisfied. The bill
would require the Secretary of Business, Transportation and Housing,
by July 1, 2009, to create a disclosure form for use by licensed
persons originating subprime home loans. The bill would provide that
a violation of the provisions regulating subprime home loans by a
licensed person is also a violation of the person's licensing law.
The bill would authorize a licensing agency or the Attorney General
to enforce the provisions regulating subprime home loans. The bill
would authorize civil penalties in an amount up to $10,000 against a
licensed person who willfully and knowingly violates the provisions
regulating subprime home loans and would make a licensed person who
violates those provisions of law liable to the borrower in the amount
of the borrower's actual damages. The bill would establish specified
duties for mortgage brokers performing mortgage brokerage services
for subprime home loans and would make those mortgage brokers jointly
and severally liable with a licensed person for violations of the
provisions regulating subprime home loans. The bill's provisions
would apply to subprime home loans originated on or after July 1,
2009. Because a violation of the bill's provisions by certain
licensed persons may be punished as crimes under the person's
licensing law, this bill would impose a state-mandated local program.
The California Constitution requires the state to reimburse local
agencies and school districts for certain costs mandated by the
state. Statutory provisions establish procedures for making that
reimbursement.
This bill would provide that no reimbursement is required by this
act for a specified reason.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: yes.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 10177 of the
Business and Professions Code is amended to read:
10177. The commissioner may suspend or revoke the license of a
real estate licensee, or may deny the issuance of a license to an
applicant, who has done any of the following, or may suspend or
revoke the license of a corporation, or deny the issuance of a
license to a corporation, if an officer, director, or person owning
or controlling 10 percent or more of the corporation's stock has done
any of the following:
(a) Procured, or attempted to procure, a real estate license or
license renewal, for himself or herself or a salesperson, by fraud,
misrepresentation, or deceit, or by making a material misstatement of
fact in an application for a real estate license, license renewal,
or reinstatement.
(b) Entered a plea of guilty or nolo contendere to, or been found
guilty of, or been convicted of, a felony, or a crime substantially
related to the qualifications, functions, or duties of a real estate
licensee, and the time for appeal has elapsed or the judgment of
conviction has been affirmed on appeal, irrespective of an order
granting probation following that conviction, suspending the
imposition of sentence, or of a subsequent order under Section 1203.4
of the Penal Code allowing that licensee to withdraw his or her plea
of guilty and to enter a plea of not guilty, or dismissing the
accusation or information.
(c) Knowingly authorized, directed, connived at, or aided in the
publication, advertisement, distribution, or circulation of a
material false statement or representation concerning his or her
designation or certification of special education, credential, trade
organization membership, or business, or concerning a business
opportunity or a land or subdivision, as defined in Chapter 1
(commencing with Section 11000) of Part 2, offered for sale.
(d) Willfully disregarded or violated the Real Estate Law (Part 1
(commencing with Section 10000)) or Chapter 1 (commencing with
Section 11000) of Part 2 or the rules and regulations of the
commissioner for the administration and enforcement of the Real
Estate Law and Chapter 1 (commencing with Section 11000) of Part 2.
(e) Willfully used the term "realtor" or a trade name or insignia
of membership in a real estate organization of which the licensee is
not a member.
(f) Acted or conducted himself or herself in a manner that would
have warranted the denial of his or her application for a real estate
license, or has either had a license denied or had a license issued
by another agency of this state, another state, or the federal
government revoked or suspended for acts that, if done by a real
estate licensee, would be grounds for the suspension or revocation of
a California real estate license, if the action of denial,
revocation, or suspension by the other agency or entity was taken
only after giving the licensee or applicant fair notice of the
charges, an opportunity for a hearing, and other due process
protections comparable to the Administrative Procedure Act (Chapter
3.5 (commencing with Section 11340), Chapter 4 (commencing with
Section 11370), and Chapter 5 (commencing with Section 11500) of Part
1 of Division 3 of Title 2 of the Government Code), and only upon an
express finding of a violation of law by the agency or entity.
(g) Demonstrated negligence or incompetence in performing an act
for which he or she is required to hold a license.
(h) As a broker licensee, failed to exercise reasonable
supervision over the activities of his or her salespersons, or, as
the officer designated by a corporate broker licensee, failed to
exercise reasonable supervision and control of the activities of the
corporation for which a real estate license is required.
(i) Has used his or her employment by a governmental agency in a
capacity giving access to records, other than public records, in a
manner that violates the confidential nature of the records.
(j) Engaged in any other conduct, whether of the same or a
different character than specified in this section, which constitutes
fraud or dishonest dealing.
(k) Violated any of the terms, conditions, restrictions, and
limitations contained in an order granting a restricted license.
(l) (1) Solicited or induced the sale, lease, or listing for sale
or lease of residential property on the ground, wholly or in part, of
loss of value, increase in crime, or decline of the quality of the
schools due to the present or prospective entry into the neighborhood
of a person or persons having a characteristic listed in subdivision
(a) or (d) of Section 12955 of the Government Code, as those
characteristics are defined in Sections 12926, 12926.1, subdivision
(m), and paragraph (1) of subdivision (p) of Section 12955, and
Section 12955.2 of the Government Code.
(2) Notwithstanding paragraph (1), with respect to familial
status, paragraph (1) shall not be construed to apply to housing for
older persons, as defined in Section 12955.9 of the Government Code.
With respect to familial status, nothing in paragraph (1) shall be
construed to affect Sections 51.2, 51.3, 51.4, 51.10, 51.11, and
799.5 of the Civil Code, relating to housing for senior citizens.
Subdivision (d) of Section 51 and Section 1360 of the Civil Code and
subdivisions (n), (o), and (p) of Section 12955 of the Government
Code shall apply to paragraph (1).
(m) Violated the Franchise Investment Law (Division 5 (commencing
with Section 31000) of Title 4 of the Corporations Code) or
regulations of the Commissioner of Corporations pertaining thereto.
(n) Violated the Corporate Securities Law of 1968 (Division 1
(commencing with Section 25000) of Title 4 of the Corporations Code)
or the regulations of the Commissioner of Corporations pertaining
thereto.
(o) Failed to disclose to the buyer of real property, in a
transaction in which the licensee is an agent for the buyer, the
nature and extent of a licensee's direct or indirect ownership
interest in that real property. The direct or indirect ownership
interest in the property by a person related to the licensee by blood
or marriage, by an entity in which the licensee has an ownership
interest, or by any other person with whom the licensee has a special
relationship shall be disclosed to the buyer.
(p) Violated Article 6 (commencing with Section 10237).
(q) Violated any provision of any of the following federal acts or
regulations:
(1) The federal Real Estate Settlement Procedures Act, as amended
(12 U.S.C. Sec. 2601 et seq.).
(2) The federal Truth in Lending Act, as amended (15 U.S.C. Sec.
1601 et seq.).
(3) The federal Home Ownership Equity Protection Act (15 U.S.C.
Sec. 1639).
(4) Any regulation promulgated under any of the federal acts cited
in paragraph (1), (2), or (3).
If a real estate broker that is a corporation has not done any of
the foregoing acts, either directly or through its employees, agents,
officers, directors, or persons owning or controlling 10 percent or
more of the corporation's stock, the commissioner may not deny the
issuance of a real estate license to, or suspend or revoke the real
estate license of, the corporation, provided that any offending
officer, director, or stockholder, who has done any of the foregoing
acts individually and not on behalf of the corporation, has been
completely disassociated from any affiliation or ownership in the
corporation.
SEC. 2. Section 10242.7 is added to the
Business and Professions Code , to read:
10242.7. (a) For purposes of this section, a higher-priced
mortgage loan is a consumer credit transaction, as defined in Part
226 of Title 12 of the Code of Federal Regulations, that is secured
by the consumer's principal dwelling in which the annual percentage
rate at consummation will exceed the yield on comparable Treasury
securities by three or more percentage points for loans secured by a
first lien on a dwelling, or by five or more percentage points for
loans secured by a subordinate lien on a dwelling.
(1) Comparable Treasury securities are determined as follows for
variable rate loans:
(A) For a loan with an initial rate that is fixed for more than
one year, securities with a maturity matching the duration of the
fixed-rate period, unless the fixed-rate period exceeds seven years,
in which case the creditor should use the rules applied to
nonvariable rate loans.
(B) For all other loans, securities with a maturity of one year.
(2) Comparable Treasury securities are determined as follows for
nonvariable rate loans:
(A) For a loan with a term of 20 years or more, securities with a
maturity of 10 years.
(B) For a loan with a term of more than seven years but less than
20 years, securities with a maturity of seven years.
(C) For a loan with a term of seven years or less, securities with
a maturity matching the term of the transaction.
(3) The creditor shall use the yield on Treasury securities as of
the 15th day of the preceding month if the creditor receives the
application between the 1st and the 14th day of the month and as of
the 15th day of the current month if the creditor receives the
application on or after the 15th day.
(b) Notwithstanding subdivision (a), a higher-priced mortgage loan
excludes a transaction to finance the initial construction of a
dwelling, a temporary or bridge loan with a term of 12 months or
less, such as a loan to purchase a new dwelling where the consumer
plans to sell a current dwelling within 12 months, a reverse mortgage
transaction, or a home equity line of credit.
(c) A higher-priced mortgage loan may provide for a prepayment
penalty otherwise permitted by law if all of the following conditions
are met:
(1) The penalty can be exercised only for the first five years
following consummation.
(2) The source of the prepayment funds is not a refinancing by the
creditor or an affiliate of the creditor.
(3) At consummation, the consumer's total debt payments, including
amounts owed under the mortgage, do not exceed 50 percent of the
consumer's monthly gross income, as verified in accordance with
subdivision (d) and by the consumer's signed financial statement, a
credit report, and payment records for employment income.
(4) The penalty period ends at least 60 days prior to the first
date, if any, on which the principal or interest payment amount may
increase under the terms of the loan.
(d) For purposes of paragraph (3) of subdivision (c), a creditor
shall not rely on amounts of income, including expected income, or
assets in approving an extension of credit unless the creditor
verifies those amounts by the consumer's Internal Revenue Service
Form W-2, tax returns, payroll receipts, financial institution
records, or other third party documents that provide reasonably
reliable evidence of the consumer's income or assets.
(e) This section shall remain operative only until amendments to
Regulation Z (12 C.F.R. Part 226), which were proposed on January 9,
2008 (73 F.R. 1672), become operative in final form, and as of
January 1 next following that date is repealed.
SEC. 3. Section 10245 of the Business
and Professions Code is amended to read:
10245. The provisions of this article, exclusive of the
provisions of Sections 10240, 10240.3, 10242.5, and
10242.6, and 10242.7, do not apply to any bona
fide loan secured directly or collaterally by a first trust deed, the
principal of which is thirty thousand dollars ($30,000) or more, or
to any bona fide loan secured directly or collaterally by any lien
junior thereto, the principal of which is twenty thousand dollars
($20,000) or more.
SEC. 4. Section 1242 is added to the
Financial Code , to read:
1242. Any licensee that violates any provision of any of the
following federal acts or regulations violates this division:
(a) The federal Real Estate Settlement Procedures Act, as amended
(12 U.S.C. Sec. 2601 et seq.).
(b) The federal Truth in Lending Act, as amended (15 U.S.C. Sec.
1601 et seq.).
(c) The federal Home Ownership Equity Protection Act (15 U.S.C.
Sec. 1639).
(d) Any regulation promulgated under any of the federal acts in
subdivision (a), (b), or (c).
SEC . 5. Section 1243 is added to the
Financial Code , to read:
1243. (a) For purposes of this section, a higher-priced mortgage
loan is a consumer credit transaction, as defined in Part 226 of
Title 12 of the Code of Federal Regulations, that is secured by the
consumer's principal dwelling in which the annual percentage rate at
consummation will exceed the yield on comparable Treasury securities
by three or more percentage points for loans secured by a first lien
on a dwelling, or by five or more percentage points for loans secured
by a subordinate lien on a dwelling.
(1) Comparable Treasury securities are determined as follows for
variable rate loans:
(A) For a loan with an initial rate that is fixed for more than
one year, securities with a maturity matching the duration of the
fixed-rate period, unless the fixed-rate period exceeds seven years,
in which case the creditor should use the rules applied to
nonvariable rate loans.
(B) For all other loans, securities with a maturity of one year.
(2) Comparable Treasury securities are determined as follows for
nonvariable rate loans:
(A) For a loan with a term of 20 years or more, securities with a
maturity of 10 years.
(B) For a loan with a term of more than seven years but less than
20 years, securities with a maturity of seven years.
(C) For a loan with a term of seven years or less, securities with
a maturity matching the term of the transaction.
(3) The creditor shall use the yield on Treasury securities as of
the 15th day of the preceding month if the creditor receives the
application between the 1st and the 14th day of the month and as of
the 15th day of the current month if the creditor receives the
application on or after the 15th day.
(b) Notwithstanding subdivision (a), a higher-priced mortgage loan
excludes a transaction to finance the initial construction of a
dwelling, a temporary or bridge loan with a term of 12 months or
less, such as a loan to purchase a new dwelling where the consumer
plans to sell a current dwelling within 12 months, a reverse mortgage
transaction, or a home equity line of credit.
(c) A higher-priced mortgage loan may provide for a prepayment
penalty otherwise permitted by law if all of the following conditions
are met:
(1) The penalty can be exercised only for the first five years
following consummation.
(2) The source of the prepayment funds is not a refinancing by the
creditor or an affiliate of the creditor.
(3) At consummation, the consumer's total debt payments, including
amounts owed under the mortgage, do not exceed 50 percent of the
consumer's monthly gross income, as verified in accordance with
subdivision (d) and by the consumer's signed financial statement, a
credit report, and payment records for employment income.
(4) The penalty period ends at least 60 days prior to the first
date, if any, on which the principal or interest payment amount may
increase under the terms of the loan.
(d) For purposes of paragraph (3) of subdivision (c), a creditor
shall not rely on amounts of income, including expected income, or
assets in approving an extension of credit unless the creditor
verifies those amounts by the consumer's Internal Revenue Service
Form W-2, tax returns, payroll receipts, financial institution
records, or other third party documents that provide reasonably
reliable evidence of the consumer's income or assets.
(e) This section shall remain operative only until amendments to
Regulation Z (12 C.F.R. Part 226), which were proposed on January 9,
2008 (73 F.R. 1672), become operative in final form, and as of
January 1 next following that date is repealed.
SEC. 6. Section 14961 is added to the
Financial Code , to read:
14961. Any licensee that violates any provision of any of the
following federal acts or regulations violates this division:
(a) The federal Real Estate Settlement Procedures Act, as amended
(12 U.S.C. Sec. 2601 et seq.).
(b) The federal Truth in Lending Act, as amended (15 U.S.C. Sec.
1601 et seq.).
(c) The federal Home Ownership Equity Protection Act (15 U.S.C.
Sec. 1639).
(d) Any regulation promulgated under any of the federal acts in
subdivision (a), (b), or (c).
SEC. 7. Section 14962 is added to the
Financial Code , to read:
14962. (a) For purposes of this section, a higher-priced mortgage
loan is a consumer credit transaction, as defined in Part 226 of
Title 12 of the Code of Federal Regulations, that is secured by the
consumer's principal dwelling in which the annual percentage rate at
consummation will exceed the yield on comparable Treasury securities
by three or more percentage points for loans secured by a first lien
on a dwelling, or by five or more percentage points for loans secured
by a subordinate lien on a dwelling.
(1) Comparable Treasury securities are determined as follows for
variable rate loans:
(A) For a loan with an initial rate that is fixed for more than
one year, securities with a maturity matching the duration of the
fixed-rate period, unless the fixed-rate period exceeds seven years,
in which case the creditor should use the rules applied to
nonvariable rate loans.
(B) For all other loans, securities with a maturity of one year.
(2) Comparable Treasury securities are determined as follows for
nonvariable rate loans:
(A) For a loan with a term of 20 years or more, securities with a
maturity of 10 years.
(B) For a loan with a term of more than seven years but less than
20 years, securities with a maturity of seven years.
(C) For a loan with a term of seven years or less, securities with
a maturity matching the term of the transaction.
(3) The creditor shall use the yield on Treasury securities as of
the 15th day of the preceding month if the creditor receives the
application between the 1st and the 14th day of the month and as of
the 15th day of the current month if the creditor receives the
application on or after the 15th day.
(b) Notwithstanding subdivision (a), a higher-priced mortgage loan
excludes a transaction to finance the initial construction of a
dwelling, a temporary or bridge loan with a term of 12 months or
less, such as a loan to purchase a new dwelling where the consumer
plans to sell a current dwelling within 12 months, a reverse mortgage
transaction, or a home equity line of credit.
(c) A higher-priced mortgage loan may provide for a prepayment
penalty otherwise permitted by law if all of the following conditions
are met:
(1) The penalty can be exercised only for the first five years
following consummation.
(2) The source of the prepayment funds is not a refinancing by the
creditor or an affiliate of the creditor.
(3) At consummation, the consumer's total debt payments, including
amounts owed under the mortgage, do not exceed 50 percent of the
consumer's monthly gross income, as verified in accordance with
subdivision (d) and by the consumer's signed financial statement, a
credit report, and payment records for employment income.
(4) The penalty period ends at least 60 days prior to the first
date, if any, on which the principal or interest payment amount may
increase under the terms of the loan.
(d) For purposes of paragraph (3) of subdivision (c), a creditor
shall not rely on amounts of income, including expected income, or
assets in approving an extension of credit unless the creditor
verifies those amounts by the consumer's Internal Revenue Service
Form W-2, tax returns, payroll receipts, financial institution
records, or other third party documents that provide reasonably
reliable evidence of the consumer's income or assets.
(e) This section shall remain operative only until amendments to
Regulation Z (12 C.F.R. Part 226), which were proposed on January 9,
2008 (73 F.R. 1672), become operative in final form, and as of
January 1 next following that date is repealed.
SEC. 8. Section 22346 is added to the
Financial Code , to read:
22346. Any licensee that violates any provision of any of the
following federal acts or regulations violates this division:
(a) The federal Real Estate Settlement Procedures Act, as amended
(12 U.S.C. Sec. 2601 et seq.).
(b) The federal Truth in Lending Act, as amended (15 U.S.C. Sec.
1601 et seq.).
(c) The federal Home Ownership Equity Protection Act (15 U.S.C.
Sec. 1639).
(d) Any regulation promulgated under any of the federal acts in
subdivision (a), (b), or (c).
SEC. 9. Section 22347 is added to the
Financial Code , to read:
22347. (a) For purposes of this section, a higher-priced mortgage
loan is a consumer credit transaction, as defined in Part 226 of
Title 12 of the Code of Federal Regulations, that is secured by the
consumer's principal dwelling in which the annual percentage rate at
consummation will exceed the yield on comparable Treasury securities
by three or more percentage points for loans secured by a first lien
on a dwelling, or by five or more percentage points for loans secured
by a subordinate lien on a dwelling.
(1) Comparable Treasury securities are determined as follows for
variable rate loans:
(A) For a loan with an initial rate that is fixed for more than
one year, securities with a maturity matching the duration of the
fixed-rate period, unless the fixed-rate period exceeds seven years,
in which case the creditor should use the rules applied to
nonvariable rate loans.
(B) For all other loans, securities with a maturity of one year.
(2) Comparable Treasury securities are determined as follows for
nonvariable rate loans:
(A) For a loan with a term of 20 years or more, securities with a
maturity of 10 years.
(B) For a loan with a term of more than seven years but less than
20 years, securities with a maturity of seven years.
(C) For a loan with a term of seven years or less, securities with
a maturity matching the term of the transaction.
(3) The creditor shall use the yield on Treasury securities as of
the 15th day of the preceding month if the creditor receives the
application between the 1st and the 14th day of the month and as of
the 15th day of the current month if the creditor receives the
application on or after the 15th day.
(b) Notwithstanding subdivision (a), a higher-priced mortgage loan
excludes a transaction to finance the initial construction of a
dwelling, a temporary or bridge loan with a term of 12 months or
less, such as a loan to purchase a new dwelling where the consumer
plans to sell a current dwelling within 12 months, a reverse mortgage
transaction, or a home equity line of credit.
(c) A higher-priced mortgage loan may provide for a prepayment
penalty otherwise permitted by law if all of the following conditions
are met:
(1) The penalty can be exercised only for the first five years
following consummation.
(2) The source of the prepayment funds is not a refinancing by the
creditor or an affiliate of the creditor.
(3) At consummation, the consumer's total debt payments, including
amounts owed under the mortgage, do not exceed 50 percent of the
consumer's monthly gross income, as verified in accordance with
subdivision (d) and by the consumer's signed financial statement, a
credit report, and payment records for employment income.
(4) The penalty period ends at least 60 days prior to the first
date, if any, on which the principal or interest payment amount may
increase under the terms of the loan.
(d) For purposes of paragraph (3) of subdivision (c), a creditor
shall not rely on amounts of income, including expected income, or
assets in approving an extension of credit unless the creditor
verifies those amounts by the consumer's Internal Revenue Service
Form W-2, tax returns, payroll receipts, financial institution
records, or other third party documents that
provide reasonably reliable evidence of the
consumer's income or assets.
(e) This section shall remain operative only until amendments to
Regulation Z (12 C.F.R. Part 226), which were proposed on January 9,
2008 (73 F.R. 1672), become operative in final form, and as of
January 1 next following that date is repealed.
SEC. 10. Section 50334 is added to the
Financial Code , to read:
50334. (a) For purposes of this section, a higher-priced mortgage
loan is a consumer credit transaction, as defined in Part 226 of
Title 12 of the Code of Federal Regulations, that is secured by the
consumer's principal dwelling in which the annual percentage rate at
consummation will exceed the yield on comparable Treasury securities
by three or more percentage points for loans secured by a first lien
on a dwelling, or by five or more percentage points for loans secured
by a subordinate lien on a dwelling.
(1) Comparable Treasury securities are determined as follows for
variable rate loans:
(A) For a loan with an initial rate that is fixed for more than
one year, securities with a maturity matching the duration of the
fixed-rate period, unless the fixed-rate period exceeds seven years,
in which case the creditor should use the rules applied to
nonvariable rate loans.
(B) For all other loans, securities with a maturity of one year.
(2) Comparable Treasury securities are determined as follows for
nonvariable rate loans:
(A) For a loan with a term of 20 years or more, securities with a
maturity of 10 years.
(B) For a loan with a term of more than seven years but less than
20 years, securities with a maturity of seven years.
(C) For a loan with a term of seven years or less, securities with
a maturity matching the term of the transaction.
(3) The creditor shall use the yield on Treasury securities as of
the 15th day of the preceding month if the creditor receives the
application between the 1st and the 14th day of the month and as of
the 15th day of the current month if the creditor receives the
application on or after the 15th day.
(b) Notwithstanding subdivision (a), a higher-priced mortgage loan
excludes a transaction to finance the initial construction of a
dwelling, a temporary or bridge loan with a term of 12 months or
less, such as a loan to purchase a new dwelling where the consumer
plans to sell a current dwelling within 12 months, a reverse mortgage
transaction, or a home equity line of credit.
(c) A higher-priced mortgage loan may provide for a prepayment
penalty otherwise permitted by law if all of the following conditions
are met:
(1) The penalty can be exercised only for the first five years
following consummation.
(2) The source of the prepayment funds is not a refinancing by the
creditor or an affiliate of the creditor.
(3) At consummation, the consumer's total debt payments, including
amounts owed under the mortgage, do not exceed 50 percent of the
consumer's monthly gross income, as verified in accordance with
subdivision (d) and by the consumer's signed financial statement, a
credit report, and payment records for employment income.
(4) The penalty period ends at least 60 days prior to the first
date, if any, on which the principal or interest payment amount may
increase under the terms of the loan.
(d) For purposes of paragraph (3) of subdivision (c), a creditor
shall not rely on amounts of income, including expected income, or
assets in approving an extension of credit unless the creditor
verifies those amounts by the consumer's Internal Revenue Service
Form W-2, tax returns, payroll receipts, financial institution
records, or other third party documents that provide reasonably
reliable evidence of the consumer's income or assets.
(e) This section shall remain operative only until amendments to
Regulation Z (12 C.F.R. Part 226), which were proposed on January 9,
2008 (73 F.R. 1672), become operative in final form, and as of
January 1 next following that date is repealed.
SEC. 11. Section 50505 of the Financial
Code is amended to read:
50505. Any person who violates any provision of the
any of the following federal acts or regulations
violates this division:
(a) The federal Real Estate
Settlement Procedures Act, as amended (12 U.S.C.A.
U.S.C. Sec. 2601 et seq.) , or any regulation
promulgated thereunder, violates this division .
(b) The federal Truth in Lending Act, as amended (15 U.S.C. Sec.
1601 et seq.).
(c) The federal Home Ownership Equity Protection Act (15 U.S.C.
Sec. 1639).
(d) Any regulation promulgated under any of the federal acts in
subdivision (a), (b), or (c).
SEC. 12. No reimbursement is required by this act
pursuant to Section 6 of Article XIII B 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 XIII B of the
California Constitution.
SECTION 1. Division 1.9 (commencing with
Section 4995) is added to the Financial Code, to read:
DIVISION 1.9. SUBPRIME HOME LOANS
4995. The following definitions shall apply 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 (15 U.S.C. Sec. 1601, et seq.) and the regulations
promulgated thereunder by the Federal Reserve Board.
(b) "Closed end loan" means a loan other than an open end credit
plan as defined in this section.
(c) "Home loan" means a loan that has all of the following
characteristics:
(1) The loan is not an equity line of credit, a construction loan,
a Federal Housing Administration-insured loan, a United States
Department of Veterans Affairs-guaranteed loan, or a reverse mortgage
transaction.
(2) The borrower is a natural person.
(3) The debt is incurred by the borrower primarily for personal,
family, or household purposes.
(4) The principal amount of the loan does not exceed the most
current conforming loan size limit for a single-family dwelling
established for the Federal National Mortgage Association.
(5) The loan is secured by (A) a security interest in a
manufactured home in the state which is or will be occupied by the
borrower as the borrower's principal dwelling, (B) a mortgage or deed
of trust on real property in the state upon which there is located
an existing structure designed principally for occupancy by one to
four families that is or will be occupied by the borrower as the
borrower's principal dwelling, or (C) a mortgage or deed of trust on
real property in the state upon which there is to be constructed
using the loan proceeds a structure or structures designed
principally for occupancy by one to four families which, when
completed, will be occupied by the borrower as the borrower's
principal dwelling.
(d) "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)).
(e) "Mortgage broker" means a licensed person that provides
mortgage brokerage services. For purposes of this division, a
licensed person who makes home loans is a "mortgage broker," and
subject to the requirements of this division applicable to mortgage
brokers, only with respect to transactions in which the licensed
person provides mortgage brokerage services.
(f) "Mortgage brokerage services" means obtaining or attempting to
obtain, on behalf of a borrower, for compensation paid directly or
indirectly, a subprime home loan made by unaffiliated third parties,
or closing a subprime home loan that may be in the mortgage broker's
own name with funds provided by an unaffiliated third party and which
loan is thereafter assigned to the person providing the funding of
the loan.
(g) "Obligor" means a borrower, coborrower, cosigner, or guarantor
obligated to repay a subprime home loan.
(h) "Open end credit plan" means credit extended by a licensed
person under a plan in which (1) the licensed person reasonably
contemplates repeated transactions, (2) the licensed person may
charge interest or otherwise impose a finance charge from time to
time on an outstanding unpaid balance, and (3) the amount of credit
that may be extended to the obligor during the term of the plan, up
to any credit limit set by the licensed person, is generally made
available to the extent that any outstanding balance is repaid.
(i) "Subprime home loan" means a home loan originated by a
licensed person where both of the following apply:
(1) The difference between the annual percentage rate for the loan
and the yield on United States Treasury securities having comparable
periods of maturity is either equal to or greater than (A) 3
percentage points, if the loan is secured by a first lien mortgage or
deed of trust, or (B) 5 percentage points, if the loan is secured by
a subordinate lien mortgage or deed of trust. Without regard to
whether the loan is subject to or reportable under the provisions of
the Home Mortgage Disclosure Act (12 U.S.C. Sec. 2801, et seq.)
(HMDA), the difference between the annual percentage rate and the
yield on United States Treasury securities having comparable periods
of maturity shall be determined using the same procedures and
calculation methods applicable to loans that are subject to the
reporting requirements of HMDA, provided that the yield on United
States Treasury securities shall be determined as of the 15th day of
the month prior to the application for the loan.
(2) The difference between the annual percentage rate for the loan
and the conventional mortgage rate is either equal to or greater
than (A) 1.75 percentage points, if the loan is secured by a first
lien mortgage or deed of trust, or (B) 3.75 percentage points, if the
loan is secured by a subordinate lien mortgage or deed of trust. For
purposes of this calculation, the "conventional mortgage rate" means
the most recent daily contract interest rate on commitments for
fixed rate first mortgages published by the Board of Governors of the
Federal Reserve System in its Statistical Release H.15, during the
week preceding the week in which the interest rate for the loan is
set.
4995.1. (a) A licensed person shall not offer the borrower a
subprime home loan that contains a provision for a prepayment
penalty, unless: (1) the licensed person offers the borrower the same
subprime home loan without a prepayment penalty, (2) the subprime
home loan with a prepayment penalty is offered at a discounted
interest rate, (3) the prepayment penalty does not exceed 2 percent
of the principal balance prepaid for prepayment occurring before the
first anniversary of loan closing, 1 percent of the principal balance
prepaid for prepayment occurring on or after the first anniversary
of loan closing but before the second anniversary of loan closing,
and 1 percent of the principal balance prepaid for prepayment
occurring on or after the second anniversary but not later than the
third anniversary of loan closing, and (4) the prepayment penalty
expires at the earlier to occur (A) three months before any scheduled
payment increase or (B) the third anniversary of the loan closing.
(b) No licensed person shall make a subprime home loan unless the
licensed person reasonably and in good faith believes at the time the
loan is consummated that one or more of the obligors, when
considered individually or collectively, has the ability to repay the
loan according to its terms and to pay applicable real estate taxes
and hazard insurance premiums. The licensed person shall determine
whether an obligor has the ability to repay the loan as follows:
(1) A licensed person's analysis of an obligor's ability to repay
a subprime home loan according to the loan terms and to pay related
real estate taxes and insurance premiums shall be based on a
consideration of the obligor's credit history, current and expected
income, current obligations, employment status, and other financial
resources other than the obligor's equity in the real property that
secures repayment of the subprime home loan.
(2) In determining an obligor's ability to repay a subprime home
loan, the licensed person shall take reasonable steps to verify the
accuracy and completeness of information provided by or on behalf of
the obligor using tax returns, payroll receipts, bank records,
reasonable alternative methods, or reasonable third-party
verification.
(3) In determining an obligor's ability to repay a subprime home
loan according to its terms when the loan has an adjustable rate
feature, a licensed person shall calculate the monthly payment amount
for principal and interest by assuming (A) the loan proceeds are
fully disbursed on the date of the loan closing, (B) the loan is to
be repaid in substantially equal monthly amortizing payments of
principal and interest over the entire term of the loan, with no
balloon payment, and (C) the interest rate over the entire term of
the loan is a fixed rate equal to the fully indexed interest rate at
the time of the loan closing, without considering any initial
discounted rate. The "fully indexed interest rate at the time of the
loan closing" means the index rate prevailing on a loan at the time
the loan is made plus the margin that will apply after the expiration
of any introductory interest rates.
(4) A licensed person's analysis of an obligor's ability to repay
a subprime home loan may utilize reasonable commercially recognized
underwriting standards and methodologies, including automated
underwriting systems, provided the standards and methodologies comply
with the provisions of this section.
(5) If a licensed person making a subprime home loan knows that
one or more home loans secured by the same real property will be made
contemporaneously to the same borrower with the subprime home loan
being made by that licensed person, the licensed person making the
subprime home loan must document the borrower's ability to repay the
combined payments of all home loans on the same real property.
(c) The provisions of this division shall apply to any licensed
person who in bad faith attempts to avoid the application of this
division by (1) dividing any loan transaction into separate parts for
the purpose and with the intent of evading the provisions of this
chapter, or (2) any other subterfuge.
(d) A licensed person shall not make, or cause to be made, any
false, deceptive, or misleading statement or representation in
connection with a subprime home loan.
(e) (1) A mortgage broker that originates a subprime home loan
shall not receive a yield spread premium unless: (A) the mortgage
broker discloses, in writing, the amount of the yield spread premium
the mortgage broker will receive at the time of application, (B) the
mortgage broker discloses in writing to the borrower at the time of
application a lower interest rate from the same lender that does not
provide for the payment of a yield spread premium by the lender to
the mortgage broker, and the mortgage broker offers the borrower the
option of obtaining the subprime home loan with that lower interest
rate subject to the payment of the mortgage broker's fee by the
borrower, and (C) the compensation received by the broker must be the
same, whether the borrower chooses the loan with the yield spread
premium or the loan with the lower interest rate and a mortgage
broker fee paid by the borrower.
(2) On or before July 1, 2009, the Secretary of Business,
Transportation and Housing shall, by rule, create a disclosure form
for use by licensed persons that fulfills the disclosure requirements
of this subdivision.
(f) For a period of six months after the consummation of a
subprime home loan, no licensed person may refinance or arrange for
the refinancing of the subprime home loan unless: (1) the borrower is
not required to pay any costs in connection with the new loan at or
before the loan closing, and (2) the new loan will reduce the
aggregate amount of interest the borrower will pay during the term of
the new loan, when compared to interest due over the full term of
the current loan. If either loan is an adjustable rate loan, the
comparison shall be based on the market interest rates on the date
the comparison is made.
(g) It shall be unlawful for any licensed person that makes a
subprime home loan to finance, directly or indirectly, any credit
life, disability, or unemployment insurance, or any other life or
health insurance premiums, provided that insurance premiums
calculated and paid on a monthly basis shall not be considered
financed by the licensed person.
(h) No licensed person shall recommend or encourage default on an
existing loan or other debt prior to and in connection with the
closing or planned closing of a subprime home loan that refinances
all or any portion of the existing loan or debt.
(i) A licensed person shall not make a subprime home loan that
contains a provision for negative amortization such that the
underwritten payment schedule for regular monthly payments causes the
principal balance to increase.
(j) A licensed person who makes a subprime home loan who, when
acting in good faith, fails to comply with this section, shall not be
liable if the licensed person establishes either of the following:
(1) Within 90 days of the loan closing and prior to the
institution of any action against the licensed person under this
section, the borrower was notified of the compliance failure, the
licensed person tendered appropriate restitution, the licensed person
offered, at the borrower's option, either to (A) make the subprime
home loan comply with the requirements of this division or (B) change
the terms of the loan in a manner beneficial to the borrower so that
the loan will no longer be considered a subprime home loan subject
to the provisions of this division, and within a reasonable period of
time following the borrower's election of remedies, the licensed
person took appropriate action based on the borrower's choice.
(2) The compliance failure was not intentional and resulted from a
bona fide error notwithstanding the maintenance of procedures
reasonably adopted to avoid those errors, and within 120 days after
receipt of a complaint or the discovery of the compliance failure or
the licensed person's receipt of written notice of the compliance
failure, the borrower was notified of the compliance failure, the
licensed person tendered appropriate restitution, the licensed person
offered, at the borrower's option, either to (A) make the subprime
home loan comply with the requirements of this division or (B) change
the terms of the loan in a manner beneficial to the borrower so that
the loan will no longer be considered a subprime home loan subject
to the provisions of this division, and within a reasonable period of
time following the borrower's election of remedies, the licensed
person took appropriate action based on the borrower's choice.
Examples of a bona fide error include clerical, calculation, computer
malfunction and programming, and printing errors.
4995.2. (a) Any licensed person who violates any provision of
this division shall be deemed to have violated that person's
licensing law. The licensing agency may, by order and after
appropriate administrative hearing, prohibit licensees under this
division from engaging in acts and practices in connection with
subprime home loans that the licensing agency finds to be unfair,
deceptive, and designed to evade laws of this state.
(b) The provisions of this division may be enforced only by the
Attorney General or the licensed person's licensing agency. Any
licensed person who willfully and knowingly violates any provision of
this division shall be liable for a civil penalty of not more than
ten thousand dollars ($10,000) for each violation.
(c) A prepayment penalty, or yield spread premium provision of a
subprime home loan that violates this division shall be
unenforceable.
(d) Notwithstanding subdivision (b), a licensed person who
violates any provision of this division is civilly liable to the
borrower for actual damages suffered by the borrower that occur as
the result of the violation.
4995.3. (a) A mortgage broker performing mortgage brokerage
services for subprime home loans, shall, in addition to duties
imposed by other statutes or at common law, do all of the following:
(1) Safeguard and account for any money handled for the borrower.
(2) Follow reasonable and lawful instructions from the borrower.
(3) Act with reasonable skill, care, and diligence.
(4) Make reasonable efforts to secure a loan that is reasonably
advantageous to the borrower considering all the circumstances,
including the rates, charges, and repayment terms of the loan.
(5) Timely and clearly disclose to the borrower material
information that may reasonably be expected to influence the borrower'
s decision and is reasonably accessible to the mortgage broker,
including the total compensation the mortgage broker expects to
receive from any and all sources in connection with each loan option
presented to the borrower.
(6) Notify, before closing, each lender of the particulars of each
of the other lender's home loans if the mortgage broker knows that
more than one home loan will be made by different lenders
contemporaneously to a borrower secured by the same real property.
(7) Provide applicants to whom credit has been denied
opportunities to correct or explain adverse or inadequate information
or to provide additional information.
(b) A mortgage broker is the fiduciary of the borrower and any
violation of the person's fiduciary duties shall be a violation of
this division. A mortgage broker who provides mortgage brokerage
services owes this fiduciary duty to the borrower regardless of
whether the mortgage broker is acting as an agent for any other party
in connection with the loan transaction.
(c) A mortgage broker who performs mortgage brokerage services in
connection with a subprime home loan, the terms of which violate the
requirements of Section 4995.1, shall be jointly and severally liable
with the licensed person for that violation.
4995.4. The provisions of this division shall apply to
subprime home loans originated on or after July 1, 2009.
4995.5. The provisions of this division are severable. If any
provision of this division 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. 2. No reimbursement is required by this
act pursuant to Section 6 of Article XIII B 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 XIII B of the
California Constitution.