California Legislature—2015–16 Regular Session

Assembly Bill No. 2275

Introduced by Assembly Member Dababneh

February 18, 2016

An act to amend Section 4973 of the Financial Code, relating to loans.

LEGISLATIVE COUNSEL’S DIGEST

AB 2275, as introduced, Dababneh. Consumer loans.

Existing law imposes various prohibitions and limitations on covered loans, defined as a specified consumer loan, including prohibiting a covered loan from being made unless a certain disclosure has been provided to the consumer prior to signing loan documents. Under existing law, the disclosure is required to include contact information for the United States Department of Housing and Community Development. Existing law provides that any licensed person, defined as, among others, a real estate broker, a finance lender or broker, a residential mortgage lender, or a savings association, who violates that disclosure requirement is deemed to have violated that person’s licensing law. A willful violation of the Real Estate Law, the California Finance Lenders Law, the California Residential Mortgage Lending Act, and the Savings Association Law is a crime.

This bill would update the contact information for the United States Department of Housing and Community Development. By changing the content of the information required to be included in that disclosure, the willful violation of which would be a crime under those aforementioned provisions, 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.

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 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 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 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
1.7 (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 begin delete 1-888-995-HOPE (4673) or
go to www.hud.gov/offices/hsg/hcc/fc/ end delete begin insert 1-800-569-4287 or go to
www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm end insert for a list of
HUD-approved housing counseling agencies.

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).

(l) (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. 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.