CHANGES TO THE LENDING
LANDSCAPE IN CALIFORNIA
EFFECTIVE NOW THROUGH JANUARY 1, 2010
On
October 11th, Governor Schwarzenegger signed a mountain of legislation into
California law. Apparently, the State has finally had enough of the
abuses in the lending business that have resulted in the current financial
crisis that we are all suffering. I cannot address each of the changes
here, since there were so many of them, but some of the major changes include:
SB 36 Requires a real estate license
endorsement from the Commissioner in order to engage in the business of a
Mortgage Loan Originator. Penalties apply if a real estate licensee fails
to obtain a license endorsement before conducting business as a Mortgage Loan
Originator, and authorizes the Commissioner to suspend or revoke a real estate
license for a failure to pay these penalties. Applicants for a license
endorsement as a Mortgage Loan Originator must furnish specified background
information to the Nationwide Mortgage Licensing System and Registry. This new
law sets standards for issuance and renewal of a license endorsement to act as
a Mortgage Loan Originator, including satisfying specified educational
requirements. Real estate licensees must annually submit business
activities reports, and other reports that may be required, to the
Commissioner. The Commissioner also may examine the affairs of real
estate brokers, including those who obtain a license endorsement as a Mortgage
Loan Originator. The Commissioner is required to report violations of the
provisions regulating real estate brokers and mortgage loan originators to the
Nationwide Mortgage Licensing System and Registry. Recipients of a license
endorsement as a Mortgage Loan Originator must use or disclose a specified
unique identifier provided by the Nationwide Mortgage Licensing System and
Registry in their advertisements and solicitations. No person is required
to have a Mortgage
Loan
Originator license under the California Finance Lenders Law or the California
Residential Mortgage Lending Act before July 1, 2010, nor a Mortgage Loan
Originator license endorsement under the Real Estate Law before December 1,
2010;
AB 260
"Higher-Priced
Mortgage Loans" are a new category of regulated loans - defined as those
secured by the consumer's principal dwelling (Residential 1-4 units) with an
APR that exceeds the average prime offer rate (the average APR that is offered
to low risk borrowers as set and published at least weekly by the Federal
Reserve Board) by 1.5 or more percentage points for loans secured by a First
lien on a dwelling, or by 3.5 or more percentage points for subordinate
loans. The new rules regarding higher-priced mortgage loans apply to both
DRE licensed and CFL lenders;
Negative
Amortization on higher-priced mortgage loans is prohibited;
Prepayment
Penalties for higher-priced mortgage loans are limited - licensees cannot
charge more than 2 percent of the principal balance prepaid for prepayment of
the loan during the first 12 months after the loan is made, or 1 percent of the
principal balance prepaid for prepayment of the loan during the second 12
months following loan consummation. If a licensee violates this
provision, they can receive no commission, fees, points, or other compensation
in connection with the loan;
Licensees
cannot divide any loan transaction into separate parts for the purpose and with
the intent of evading the provisions of this new law. This Bill clearly
confirms that a mortgage broker owes their client(s) a fiduciary duty, and it
emphasizes and expands the penalties that licensees may receive for making any
false, deceptive, or misleading statements or representations regarding
higher-priced mortgage loans, The Bill authorizes DRE, the Department of
Corporations, or the Attorney General to enforce the provisions regulating
higher-priced mortgage loans. Civil penalties of up to $10,000 may be
imposed against a licensee who willfully and knowingly violates the provisions
of this law, and any violation(s) would nullify prepayment penalties or yield
spread premiums that violate the limits set forth above. The statute
provides that Mortgage brokers must place the economic interest of the borrower
ahead of his or her own economic interest;
Your
license may be revoked or suspended if you: knowingly authorize, direct,
connive at, or aid in the publication, advertisement, distribution, or
circulation of a material false statement or representation concerning your
designation or certification of special education, credential, trade
organization membership, or business, or concerning a business opportunity or a
land or subdivision, offered for sale. Your license may also be in
jeopardy if you willfully use the term "Realtor" or a trade name or
insignia of membership in a real estate organization of which you are not a
member;
DRE
penalties are also imposed if you fail to disclose to the buyer of real
property, in a transaction in which the you are an agent for the buyer, the
nature and extent of your 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 also must be disclosed to the buyer.
A
mortgage broker who arranges only higher-priced mortgage loans must disclose
that fact to a borrower, both orally and in writing, at the time of initially
engaging in mortgage brokerage services with that borrower;
A
mortgage broker who provides mortgage brokerage services shall not steer,
counsel, or direct a borrower to accept a loan at a higher cost than that for
which the borrower could qualify based upon the loans offered by the persons
with whom the broker regularly does business;
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
higher-priced mortgage loan that refinances all or any portion of the existing
loan or debt;
Violation
of federal RESPA, the federal TRUTH IN LENDING ACT, the federal HOME
OWNERSHIP EQUITY PROTECTION ACT, the Franchise Investment Law, the Corporate
Securities Law of 1968,or other federal laws or regulations now constitute a
violation of State licensing laws too;
If a
licensee makes a higher-priced mortgage loan in violation with the terms set
forth above, but is acting in good faith, they have 90 days after the loan
closes to: (1) Notify the borrower of the compliance failure, (2) Tender
appropriate restitution, and (3) Offer to make the loan compliant with the
law's requirements or change the terms of the loan to benefit the borrower so
that the loan is no longer a higher-priced mortgage loan, at the borrower's
option;
In
addition, the new law makes it a felony to commit fraud on a loan application;
The new
law applies to all higher-priced mortgage loans originated on or after July 1,
2010.
Many of
the violations set forth above, regarding licensees' conduct, were already
illegal, and licensees know that they are subject to discipline for violations
of these laws and regulations. But the State is now getting more serious about
enforcing these provisions, and many new limitations and penalties have been
imposed by AB 260.
SB 239 modifies
the Penal Code to create a new crime, a felony, for those who commit fraud on
loan applications. A person commits mortgage fraud if, with the intent to
defraud, the person does any of the following: (1) Deliberately makes any
misstatement, misrepresentation, or omission during the mortgage lending
process with the intention that it be relied on by a mortgage lender, borrower,
or any other party to the mortgage lending process, (2) Deliberately uses or
facilitates the use of any misstatement, misrepresentation, or omission,
knowing the same to contain a misstatement, misrepresentation, or omission,
during the mortgage lending process with the intention that it be relied on by
a mortgage lender, borrower, or any other party to the mortgage lending
process, (3) Receives any proceeds or any other funds in connection with a
mortgage loan closing that the person knew resulted from a violation of
paragraph (1) or (2) of this subdivision, (4) Files or causes to be filed with the
recorder of any county in connection with a mortgage loan transaction any
document the person knows to contain a deliberate misstatement,
misrepresentation, or omission. Effective January 1, 2010;
AB 329, The Reverse Mortgage Elder Protection Act of 2009 imposes
additional new disclosure requirements (clearer and more information) for
reverse mortgages. This law becomes effective January 1, 2010;
SB 237 creates
a program which requires registration of appraisal management companies, which
are defined as, any person or entity that satisfies all of the following
conditions: (A) Maintains an approved list or lists, containing 11 or
more independent contractor appraisers licensed or certified pursuant to this
part, or employs 11 or more appraisers licensed or certified pursuant to this
part, (B) Receives requests for appraisals from one or more clients, (C) For a
fee paid by one or more of its clients, delegates appraisal assignments for
completion by its independent contractor or employee appraisers. This law
makes any provision under the Real Estate Appraisers' Licensing and
Certification Law that relates to appraisal management companies inoperative 60
days after the effective date of any federal law that mandates the registration
or licensing of appraisal management companies with an entity other than the
state regulatory authority with jurisdiction over appraisers. Effective
January 1, 2010;
AB 957 The
Buyer's Choice Act gives buyers of residential 1-4 unit properties at a
foreclosure sale the power to choose the escrow officer and title company,
rather than being forced to use the lender's services. The penalty for a
seller violating this statute is damages equal to three times the cost of the
escrow services or title insurance policy. This statute went into effect
on October 11, 2009;
AB 1160 Requires lenders to provide to borrowers loan
documents for mortgages to be written in the same language as that in which the
negotiations primarily took place: Spanish, Chinese, Tagalog, Vietnamese
or Korean. Becomes operative beginning on July 1, 2010 or 90 days after
issuance of a form, whichever occurs later. This law does not change a
real estate broker's obligations to their client(s);
This
Legal Update encompasses literally hundreds of pages of new laws. It is
intended to merely be a summary of some of the terms of these laws. You
are urged to go to and read the actual law if it impacts your business, and not
to rely on these summaries. Good Luck!