Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) A real estate broker
acting within the meaning of Section 10131.1 of the Code shall adopt and adhere to
the policies and procedures set forth in the guidance on nontraditional mortgage
product risks published on November 14, 2006, by the Conference of State Bank
Supervisors and the American Association of Residential Mortgage Regulators, and the
Statement on Subprime Mortgage Lending published on July 17, 2007, by the
aforementioned entities and the National Association of Consumer Credit
Administrators, and which are incorporated by reference.
(b) Pursuant to subdivision (a), a real estate
broker shall, at a minimum, adopt and adhere to the following:
(1) Risk Management Practices
(A) Consider a borrower's ability to repay the
mortgage loan according to its terms as the primary basis for making the loan rather
than the foreclosure or liquidation value of the collateral.
(B) Ensure that a loan results in an identifiable
benefit to the borrower and refrain from inducing a borrower to repeatedly refinance
a loan in order to charge high points and fees each time the loan is
refinanced.
(C) Fully disclose the true
nature of the mortgage loan obligation, or ancillary products to the
borrower.
(2) Underwriting
Standards
(A) Analyze a borrower's repayment
capacity to include an evaluation of his/her ability to repay the loan by final
maturity at the fully indexed rate, assuming a fully amortizing repayment schedule.
For products that permit negative amortization, a repayment analysis should be based
on the initial loan amount plus any balance increase that may accrue from the
negative amortization.
(B) Avoid
combining nontraditional loan features such as interest-only or negative
amortization loans with reduced documentation or simultaneous second-lien loans
(piggyback) unless there are mitigating factors such as high credit scores, low loan
to value ratios (LTVs) and debt to income ratios (DTI), significant liquid assets,
mortgage insurance or other credit enhancements.
(C) Accept stated income or reduced documentation
only if there are mitigating factors that clearly minimize the need for direct
verification of the borrower's repayment. The mitigating factors shall be
documented.
(D) When setting
introductory rates on adjustable rate mortgages, consider the spread between the
introductory rate and the fully indexed rate to minimize negative amortization,
"payment shock" and earlier-than-scheduled recasting of monthly payments. Pursuant
to the Statement on Subprime Mortgage Landing "... [p]ayment shock refers to a
significant increase in the amount of the monthly payment that generally occurs as
the interest rate adjusts to a fully indexed basis. Products with a wide spread
between the initial interest rate and the fully indexed rate that do not have
payment caps or periodic interest rate caps, or that contain very high caps, can
produce significant payment shock".
(E)
When making loans to borrowers ensure that such programs do not feature terms that
could become predatory or abusive as described in the "Statement on Subprime
Mortgage Lending" under "Predatory Lending Considerations" and the "Guidance on
Nontraditional Mortgage Product Risks" under "Lending to Subprime
Borrowers".
(F) Qualify borrowers
financing non-owner occupied investment properties on their ability to service the
debt over the life of the loan and require evidence that the borrower has sufficient
cash reserves to service the loan considering the possibility of extended periods of
property vacancy and the variability of debt service requirements associated with
nontraditional mortgage loan products.
(G) Qualify a borrower's repayment capacity by a
debt-to-income (DTI) ratio that includes an assessment of the borrower's total
monthly housing-related payments (e.g. principal, interest, taxes and insurance) and
total monthly obligations as a percentage of gross income.
(3) Control Systems
(A) Design compensation programs that avoid
providing incentives for originations inconsistent with sound underwriting and
consumer protection principles. Such programs should not result in the steering of
consumers to products resulting in payment shock or containing prepayment penalties,
balloon payments or a higher cost due to reduced documentation or stated income, to
the exclusion of other products for which the consumer may qualify.
(B) Monitor the quality of third-party
originations so that they reflect the broker's lending standards and compliance with
the Real Estate Law, Regulations of the Real Estate Commissioner and other
applicable state and federal laws and regulations.
(4) Consumer Protection
(A) In approving loans, primarily consider the
borrower's ability to repay the loan according to its terms.
(B) Assist the consumer in selecting a product by
providing information that enables the consumer to understand material terms, costs,
and risks of loan products.
(C) When
offering mortgage product descriptions and advertisements, provide clear, detailed
information about the costs, terms, features, and risks of the loan to the borrower
including:
* Potential payment shock
* Negative amortization
* Prepayment penalties
* Balloon payments
* Cost of reduced documentation loans
* Responsibility for taxes and insurance
(D) Provide monthly statements to consumers who
have Payment Option adjustable rate mortgages (ARMs) which include information that
enables consumers to make informed payment choices, and which include an explanation
of each payment option available and the impact of that choice on loan
balances.
(E) Avoid leading borrowers
who have Payment Option ARMs to select a non-amortizing or negatively amortizing
payment.
1. New section
filed 1-14-2008 as an emergency; operative 1-14-2008 (Register 2008, No. 3). A
Certificate of Compliance must be transmitted to OAL by 7-14-2008 or emergency
language will be repealed by operation of law on the following day. For prior
history, see Register 61, No. 15.
2. Certificate of Compliance as to
1-24-2008 order, including further amendment of subsections (b)(2)(D)-(E) and
(b)(4)(A), transmitted to OAL 7-3-2008 and filed 8-15-2008 (Register 2008, No.
33).
Note: Authority cited: Sections
10080
and
10240.3,
Business and Professions Code. Reference: Sections
10131.1,
10240.3
and
10245,
Business and Professions Code.
