Cal. Code Regs. Tit. 10, § 2844 - Lending Practices for Nontraditional and Subprime Mortgage Products

(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.

Notes

Cal. Code Regs. Tit. 10, § 2844

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.

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).