BILL NUMBER: AB 1837 INTRODUCED
BILL TEXT
INTRODUCED BY Assembly Member Garcia
JANUARY 24, 2008
An act to amend Sections 4970 and 4973 of, and to add Section
4973.4 to, the Financial Code, relating to loans.
LEGISLATIVE COUNSEL'S DIGEST
AB 1837, as introduced, Garcia. Consumer loans: subprime and
nontraditional loans.
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. Existing law defines a
"consumer loan" as a consumer credit transaction secured by
residential real property, subject to certain exceptions, and defines
a "covered loan" as a consumer loan that meets certain other
requirements. Existing law prohibits a covered loan from including a
prepayment penalty after the first 36 months from the date of
consumation of the loan but authorizes a covered loan to include a
prepayment penalty before that time period if specified conditions
are satisfied. Violations of these limitations and prohibitions by
licensed persons are deemed to be violations of the person's
licensing law and may be punishable by, among other things,
disciplinary action, civil liability, and the imposition of
administrative penalties and civil penalties up to $25,000, as
specified.
This bill would prohibit a covered loan from including a
prepayment penalty after the first 24 months from the date of
consumation of the loan and would authorize a covered loan to include
a prepayment penalty before that time period if specified conditions
are satisfied. The bill would define the terms "subprime loan" and
"nontraditional loan" and would prohibit these loans from including
prepayment fees or penalties. The bill would also prohibit a licensed
person from receiving any compensation for originating a subprime
loan or nontraditional loan with an interest rate above the wholesale
par rate for which the consumer qualifies. The bill's provisions
would apply to consumer loans originated on or after January 1, 2009.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 4970 of the Financial Code is amended to read:
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) "Covered loan" means 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 where one of the following
conditions are met:
(1) 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.
(2) 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.
(c) "Subprime loan" or "subprime mortgage" means a loan secured by
a dwelling that is, or will be, the borrower's principal dwelling
and in which the annual percentage rate exceeds the greater of either
of the following:
(1) If the loan is a closed-end loan, the difference between the
annual percentage rate for the loan and the yield on 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.
If the loan is an open-end credit plan, the difference between the
annual percentage rate for the loan and the yield on United States
Treasury securities having comparable periods of maturity is equal to
or greater than 3 percentage points, regardless of whether the
open-end credit plan is secured by a first or subordinate lien
mortgage or deed of trust. Without regard to whether the loan is
subject to or reportable under the provisions of the federal 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 the HMDA.
(2) The difference between the annual percentage rate for the loan
and the annual yield on conventional mortgages published by the
Board of Governors of the Federal Reserve System, as published in
statistical release H.15 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.
(d) "Nontraditional loan" or "nontraditional mortgage" means a
loan or mortgage product that allows the borrower to defer payment of
principal and, sometimes, interest, as set forth in the "Interagency
Guidance on Nontraditional Mortgage Product Risks" (71 Fed. Reg.
58609 (Oct. 4, 2006)).
(c)
(e) "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)
(f) "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. For purposes of this division, a bridge loan
is any temporary loan, having a maturity of one year or less, for the
purpose of acquisition or construction of a dwelling intended to
become the consumer's principal dwelling.
(e)
(g) "Original principal balance" means the total
initial amount the consumer is obligated to repay on the loan.
(f)
(h) "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)
(i) "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)
(j) "Originate" means to arrange, negotiate, or make a
consumer loan.
(i)
(k) "Servicer" has the same meaning provided in Section
6 (i)(2) of the Real Estate Settlement Procedures Act of 1974.
SEC. 2. Section 4973 of the Financial Code is amended to read:
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 24 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 24 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 2 percent of the amount prepaid .
(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 person who originates the loan
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.
(j) A person who originates a covered loan 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.
(k) (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
1-800-569-4287 or go to www.hud.gov/fha/sfh/hcc
www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm
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).
() (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.
(m) 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.
(n) 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.
SEC. 3. Section 4973.4 is added to the Financial Code, to read:
4973.4. (a) (1) A subprime loan or nontraditional loan shall not
include a prepayment fee or penalty.
(2) A consumer loan that is not a subprime loan or nontraditional
loan may include a prepayment fee or penalty that does not extend
beyond two years and that does not exceed an amount equal to 2
percent of the amount prepaid on the loan.
(3) A consumer loan that is not a subprime loan or nontraditional
loan and that has an adjustable interest rate shall not contain any
prepayment fee or penalty that has a term that extends beyond the
term during which the initial interest rate is fixed under the loan.
(b) A licensed person shall not receive, directly or indirectly,
any compensation for originating a subprime loan or nontraditional
loan with an interest rate above the wholesale par rate for which the
consumer qualifies.
SEC. 4. The provisions of this act shall apply to consumer loans
originated on and after January 1, 2009.