BILL ANALYSIS
SENATE BANKING, COMMERCE AND INTERNATIONAL TRADE
Senator Michael J. Machado, Chairman Bill No:AB 489
Author:Migden
Amended: As Proposed to
be
Amended
(RN120885)
Hearing: August 30, 2001 Fiscal: Yes
SUBJECT: Loans secured by real property
DIGEST -- WHAT THE BILL DOES
EXISTING LAW provides for the regulation and licensure of
residential mortgage lenders and residential loan services
through the California Residential Mortgage Lending Act
(commencing with Financial Code Section 50000). This act
prohibits a licensee from committing fraud or from making a
misstatement or omission of a material fact pertaining to a loan
and provides civil, administrative, and criminal sanctions for
the commission of such prohibited acts (Financial Code Sections
50500-50505).
Existing federal law establishes the Home Ownership and
Equity Protection Act (HOEPA) (15 U.S.C. Section 1639). This
act provides that any purchaser or assignee of a HOEPA loan
shall be subject to all claims and defenses the borrower could
assert against the original creditor or maker of the loan, with
certain limitations and offsets on allowable damages.
Existing law prohibits the unfair competition, fraudulent
business act or practice, and untrue or misleading advertising
(Business and Professions Code 17200).
THIS BILL prohibits licensed persons from engaging in
specified prohibits acts when making covered loans, as defined.
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This bill defines a "covered loan" as a consumer loan in
which the original principal balance of the loan does not exceed
$250,000 for a mortgage or deed of trust, and where one of the
following conditions are met:
1. For a mortgage, 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.
2. Total points and fees payable by the consumer at or
before closing for a mortgage will exceed six percent of
the total loan.
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This bill includes the following in the definition of
"points and fees":
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.
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.
This bill defines a "licensed person" as a real estate
broker licensed under the Real Estate Law, a finance lender or
broker licensed under the California Finance Lenders Law, a
residential mortgage lender licensed under the California
Residential Mortgage Lending Act, a commercial or industrial
bank organized under the Banking Law, a savings association
organized under the Savings Association Law, and a credit union
organized under the California Credit Union Law. 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.
This bill defines "credit insurance" as any individual or
group credit life, credit disability, credit unemployment,
accident, health, or loss-of-income insurance or any other line
or sub-line of insurance which may become accepted as credit
insurance by the insurance and lending industries.
This bill prohibits a licensed person from financing points
and fees in excess of 6 percent of the total loan amount for a
covered loan.
This bill prohibits a licensed person from engaging in any
one of 15 prohibited acts with regards to a consumer loan. The
prohibited acts include, but are not limited to, the following:
1.Charging a prepayment fee or penalty on a covered loan after
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the first 36 months of consummation of the loan, unless
certain exemption conditions are met. The conditions include:
(a) a covered loan may include a prepayment fee or penalty up
to the first 36 months of the consummation of the loan if the
licensed person has offered a product without a prepayment
penalty; (b) disclosed in writing at least three business days
prior about the terms of the 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 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 prepayment penalty will not be imposed if the
covered loan is accelerated as a result of default; and (e)
the person who originates a loan will not finance a prepayment
penalty through a new loan that is originated by the same
person.
2.Making or arranging a covered loan without regard to the
consumer's ability to pay. In assessing the consumer's
ability to pay the obligations, the licensed person may
consider the consumer's current and expected income, current
obligations, employment status, and other financial resources,
other than the consumer's equity in the dwelling which 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.
Presuming the consumer's ability to make the scheduled
payments to repay the obligation if, at the time the loan is
consummated, the consumer's totally monthly debts do not
exceed 55 percent of the consumer's monthly gross income. No
presumption of inability to make the schedule payments to
repay the obligation shall arise solely from the fact that the
consumer's total monthly debts exceed 55 percent of the
consumer's monthly gross income.
In relation to a stated income loan, the ability to repay a
loan may be based on the income stated by the consumer, and
other information customarily solicited in connection with
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loans of this type. A person shall not knowingly or willfully
originate a covered loan as a stated income loan with the
intent of evading the provisions of this subdivision.
3.Prohibiting a licensed person, until July 1, 2002, from
selling credit insurance on a prepaid single premium basis in
conjunction with a covered loan unless (a) the licensed person
also offers the option of purchasing all such insurance on a
monthly premium basis, (b) the licensed person provides a
separate disclosure to the consumer, and (c) requires either a
full premium refund or a full premium credit against the
unpaid loan balance if a consumer elects to cancel the
insurance. Beginning July 1, 2002, credit insurance can not
be sold on a prepaid single premium basis in conjunction with
a covered loan.
4.Refinancing or arranging for the refinancing of a covered loan
such that the new loan is a covered loan that is made
primarily for the purpose of refinancing, debt consolidation,
or cash out and does not result in a net benefit for the
consumer after considering all fees, interest rate, points and
other costs and the consumer's stated purpose for seeking the
loan.
5.Making a covered loan without disclosing a Consumer Caution
and Home Ownership Counseling Notice to the consumer. The
notice would inform the consumer that he/she has obtained a
loan that may have a higher rate and total points and fees
than other mortgage loans and he/she could lose their home if
he/she is unable to make the required payments. The
disclosure statement also suggests that the consumer may want
to consider discussing their financial situation with a credit
counselor.
6.Steering, counseling, or directing 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,
considering the information available to that person,
including the information provided by the consumer. If the
licensed person is a broker, the licensed person shall not
steer, counsel, or direct any prospective consumer to accept a
loan product at a higher cost than that for which the consumer
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could qualify based on the loan products offered by the
lenders with whom the broker regularly does business.
7.Including in a covered loan that requires the payment of the
entire balance of the loan before the maturity date of the
loan shall not require the payment of hat balance until 60
months after the consummation of the loan. A payment
schedule, not to exceed the amount of one year's worth of
payments on the loan, can be adjusted for seasonal or
irregular income of the consumer.
8.Including a provision in a covered loan 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.
This bill provides that a consumer complaint, which the
compliance failure was not willful or intentional and resulted
from a bona fide error, shall be resolved no later than 45 days
after receipt of the error. A bona fide error can mean
clerical, calculation, computer malfunction and programming and
printing errors. A person who originates a covered loan shall
not be civilly, administratively, or criminally liable for a
bona fide error corrected.
This bill provides that a licensing agency may, after
appropriate notice and opportunity for a hearing, by order levy
administrative penalties against a licensed person who violates
any provision. The licensed person shall be liable for
administrative penalties of not more than $2,500 for each
violation. A licensed person who willfully and knowingly
violates any provision shall be liable for a civil penalty of
not more than $25,000 for each violation which shall be assessed
and recovered in a civil action brought on behalf of the people
of the State of California. In the event actual damages cannot
be ascertained, the licensed person shall be liable in the
amount not to exceed $50,000 plus attorneys fees and costs.
This bill provides that a court in which any action is
brought by, or on behalf of, an aggrieved consumer for relief
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may issue an order or injunction to reform the terms of the
covered loan. Additionally, the court may award punitive
damages to the consumer up to three times the original principal
balance of the covered loan upon a finding that such damages are
warranted under Section 3294 of the Civil Code.
This bill states that nothing in this division shall be
construed to preclude an injured party from bringing a civil
action for a violation of the provisions.
This bill provides that a licensing agency or district
attorney shall be entitled to recover costs, at the court's
discretion, may include an amount representing reasonable
attorneys fees and investigative expenses for services rendered
for deposit in the appropriate fund of that state or local
agency. The administrative and civil penalties collected shall
be used for the purposes of education and enforcement in
connection with abusive lending practices.
This bill provides that any licensed person who willfully
and knowingly violates the prohibited acts shall, upon
conviction, be subject to a fine of not more than $250,000, or
imprisonment in county jail, or both fine and imprisonment.
Fines collected under this provision shall be paid to the
treasurer of the county in which the action was brought. One
half of the fine shall be allocated to county programs that
educate consumers about avoiding abusive lending practices,
community-based programs to provide low-cost alternatives to
subprime credit, and consumer complaint resolution services.
This bill provides that a licensed person who violates any
of the prohibited acts shall be deemed to have violated that
person's licensing law. A licensing agency may bring a
proceeding to suspend or permanently revoke the license of a
licensed person who has been convicted under the civil
provisions.
This bill establishes a fiduciary duty for mortgage brokers
who provide brokerage services to lenders or who negotiate the
consumer loan secured by real property. States that a mortgage
broker owes a consumer a fiduciary duty of utmost care, honesty,
and loyalty in the transaction, including the duties of fair
dealing and full disclosure of all material facts. If the
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broker is authorized to act as an agent of any other person
relative to the transaction, the broker shall disclose that fact
and the identification of that person in a written statement.
This bill applies to a consumer loan originated on and
after July 1, 2002.
FISCAL EFFECT:
Unknown.
COMMENTS:
A. Purpose of the bill
According to the author, predatory lending has taken a
heavy toll on California homeowners. Too many seniors and low
and moderate income families have been beguiled by unscrupulous
lenders and brokers that employ equity-stripping practices, such
as loan "flipping" and charging excessive fees, causing many
borrowers to lose their homes. AB 489 will provide borrowers
with important protections against these deceptive and
destructive lending practices that are not currently available
in state or federal law.
B. Background
Since June, the Senate Banking, Commerce and International
Trade Committee has conducted workshop meetings with industry
and regulatory representatives to work on language that would
address the issue of abusive high cost loan practices. The
workshop meetings resulted from the Committee hearing on SB 608
by Senator Dunn. The committee decided to hold the bill under
advisement. The current language in AB 489 reflects a working
product by the Committee staff.
C. Home Ownership and Equity Protection Act (HOEPA)
HOEPA is a federal law designed to protect borrowers of
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certain high-cost mortgage loans, by requiring additional
disclosures to borrowers and restricting improper lending
practices. HOEPA does not prohibit loans with high interest
rates or fees or cap rates or fees. Rather, it subjects certain
loans, the rates or fees for which exceed specified levels, to
enhanced disclosures, restrictions on certain contract terms,
and private and administrative consumer remedies for violations.
HOEPA's requirements are set forth in the federal Truth and
Lending Act (Title 15, United States Code, Section 1639) and the
federal regulations adopted in regulation Z (Title 12, Code of
Federal Regulations, Section 226.32).
HOEPA applies to a closed-end (installment) loan secured by
a borrower's principal dwelling that meets either of the
following tests: (1) the annual percentage rate exceeds by more
than 10 percentage points the rates on Treasury securities of
comparable maturity, or (2) the total fees and points payable
for the borrower at or before closing exceed the larger of 8
percent of the loan amount of $400. HOEPA does not apply to
loans involving the initial purchase of a home, open-end credit
plans, or reverse mortgages.
Under a loan covered by HOEPA, the borrower must receive
(at least 3 business days before closing) the following written
disclosures in addition to any disclosures already required
under existing law: (1) a statement that the loan need not be
completed even if the borrower signs the loan application and
receives the required disclosures (thereby giving the borrower a
3-day right of rescission); (2) a warning that the borrower can
lose the home and any money put into it, if there is a failure
to make payments; and (3) the APR and the amount of the regular
monthly payment and, in the case of a variable rate loan, a
statement that the rate and monthly payment may increase to a
specified maximum amount. In addition, if the loan terms are
modified after these disclosures are made to the borrower, the
borrower must receive new disclosures to reflect the
modifications.
D. Prohibited Acts
In June 2000, the United States Department of Housing and
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Urban Development (HUD) and the United States Department of
Treasury released a report entitled "Curbing Predatory Home
Mortgage Lending," which contained a number of legislative and
regulatory recommendations to combat predatory lending, while
maintaining access to credit for low- and moderate-income
borrowers.
The report highlighted deceptive practices that are
generally talked about in the context of predatory lending
practices. It should be noted that there are no state or
federal statutes or regulations that define the term "predatory
lending".
The report outlined the abuses in four main categories: (1)
loan flipping, where mortgage originators refinance borrowers'
loans repeatedly in a short period of time; (2) excessive fees
and "packing", where fees are charged that exceed what would be
expected or justified based on economic grounds and "packing"
fees into the loan amount without the borrower's understanding;
(3) lending without regard to the borrower's ability to repay,
which can result in borrower's having to default on their loan
or foreclose on their home; and (4) outright fraud and abuse.
As proposed to be amended, AB 489 addresses the
aforementioned and other abusive lending practices. The bill
precludes specific acts that lenders are prohibited from
engaging in when making "covered loans".
SUPPORT AND OPPOSITION:
A. Support:
No support letters have been received by the Committee for
the July 12, 2001 version of AB 489. No official letters of
support have been received for AB 489 as proposed to be amended
with RN 120885.
B. Opposition:
Opposition letters received by the Committee for the July
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12, 2001 version of AB 489. No official letters of opposition
have been received for AB 489 as proposed to be amended with RN
120885.
California Association of Mortgage Brokers
California Bankers Association
California Financial Services Association
California Land Title Association
California Mortgage Bankers Association
Countrywide Home Loans, Inc.
Household International
New Century Mortgage Corporation
Option One Mortgage Corporation
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Consultant: Bethany Knorr (916) 445-6306
Date: August 29, 2001