BILL NUMBER: AB 489 AMENDED
BILL TEXT
AMENDED IN SENATE JULY 10, 2001
AMENDED IN SENATE JUNE 21, 2001
AMENDED IN ASSEMBLY MAY 30, 2001
AMENDED IN ASSEMBLY MAY 1, 2001
AMENDED IN ASSEMBLY APRIL 19, 2001
AMENDED IN ASSEMBLY APRIL 5, 2001
INTRODUCED BY Assembly Member Migden
FEBRUARY 21, 2001
An act to add Section 10247.5 to the Business and Professions
Code, to add Chapter 7.6 (commencing with Section 1922) to Title 4 of
Part 4 of Division 3 of the Civil Code, and to add Sections 3398,
7508, 22168, and 50511 to the Financial Code, relating to lending.
LEGISLATIVE COUNSEL'S DIGEST
AB 489, as amended, Migden. Loans secured by real property.
Existing law provides for regulation of banks and savings
associations by the Department of Financial Institutions. Existing
law provides for regulation of real estate brokers by the Department
of Real Estate. Existing law provides for regulation of finance
lenders and residential mortgage lenders by the Department of
Corporations. Existing law provides that willful violations of
provisions governing savings associations, real estate brokers, and
residential mortgage lenders are crimes.
This bill would prohibit real estate brokers and agents,
commercial and industrial banks, savings associations, finance
lenders, and residential mortgage lenders that make or service
high-cost residential mortgage loans or consumer loans secured by
liens on real property to consumers whose household income
is at or below 120 percent of the median household income
for the area from engaging in the following lending practices in the
making of high-cost loans: making a subsequent loan to refinance
the original loan that results in no substantial net
economic benefit, selling of additional products in the loan
agreement, making of a loan without regard to the borrower's
monthly income and obligations ability to repay
, and charging of fees for loan services that bear no reasonable
relationship to the value and cost of services actually
performed. The bill would define a high-cost loan to mean a loan
that has an annual percentage rate in excess of a specified rate or
that has points and fees in excess of 5 percent of the loan amount.
Because willful violations of these provisions with respect to
savings associations, real estate brokers, and residential mortgage
lenders would be crimes, this bill would impose a state-mandated
local program by creating new crimes.
This bill would also impose various requirements with respect to
residential mortgage loans and consumer loans secured by liens on
real property made or serviced by specified lenders. A willful
violation of these provisions would be a crime and would permit a
court to rescind the loan contract and award fees and costs, as
specified.
This bill would also make a statement of legislative findings and
intent.
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. The Legislature finds and declares all of the
following:
(a) There has been an explosion in the amount of credit made
available to low-income borrowers in recent years, as a result of
economic growth, technological changes, and financial innovations. A
significant portion of this expansion has occurred in the subprime
lending market, which refers to lending to borrowers who do not
qualify for prime rates, either because of impaired credit histories
or low incomes. According to the United States Department of the
Treasury, subprime lending nationwide increased from $35 billion in
1994 to $370 billion in 1999.
(b) Subprime loans often are structured as mortgage refinancings
or second mortgages. Approximately 70 percent of subprime loans are
for consumer credit card consolidation. Most subprime loans are made
by nondepository finance or mortgage companies that are not subject
to routine regulatory compliance review.
(c) Many subprime lenders offer a vital service to low-income
borrowers who do not qualify for credit from mainstream financial
institutions. However, many low-income borrowers have been victimized
by improper subprime lending practices such as excessive fees and
interest rates, repetitive refinancings, hidden costs, unnecessary
insurance, and deceptive use of balloon payments. The abusive
practices found in the subprime lending industry are referred to as
predatory lending. Through misleading and deceptive sales practices,
predatory lenders target cash-poor homeowners as customers for
high-cost loans that often deprive these homeowners of the equity in
their homes.
(d) It is the intent of the Legislature to improve consumers
protection against predatory lending practices.
SEC. 2. Section 10247.5 is added to the Business and Professions
Code, to read:
10247.5. (a) Notwithstanding any other provision of law, this
section shall apply to all high-cost residential mortgage loans and
consumer loans secured by liens on real property made or serviced by
a real estate broker or agent to a consumer whose household
income is at or below 120 percent of the median household
income of the standard metropolitan statistical area in which
the consumer resides or the nearest area if the consumer does not
reside within a standard metropolitan statistical area.
(b) A "high-cost" loan means a loan that is either of the
following:
(1) The annual percentage rate at consummation will exceed by more
than 5 percentage points the yield on Treasury securities having
comparable periods of maturity to the loan maturity as of the 15th
day of the month immediately proceeding the month in which the
application for the extension of credit is received by the creditor.
(2) The total points and fees payable by the consumer at or before
loan closing will exceed 5 percent of the total loan amount.
(c) The following lending practices are prohibited in the making
of high-cost loans:
(c) Predatory lending practices are prohibited in the making and
servicing of high cost loans. These practices include, but are not
limited to, the following:
(1) The making of a subsequent loan to refinance the original
loan, also known as "flipping," that results in no net
substantial economic benefit to the borrower.
(2) The selling of additional products in a loan agreement , also
known as "packing."
(3) The making of a loan without regard to the borrower's
monthly income and obligations. ability to repay,
considering the borrower's current and expected income, current
obligations, and employment status.
(4) The charging of fees for loan services that bear no reasonable
relationship to the value and cost of services actually
performed.
SEC. 3. Chapter 7.6 (commencing with Section 1922) is added to
Title 4 of Part 4 of Division 3 of the Civil Code, to read:
CHAPTER 7.6. LOANS SECURED BY REAL PROPERTY
1922. (a) Notwithstanding any other provision of law, this
section shall apply to all high-cost residential mortgage loans and
consumer loans secured by liens on real property made or serviced by
a real estate broker or agent, a commercial or industrial bank, a
savings association, or a finance lender to a consumer whose
household income is at or below 120 percent of the median
household income of the standard metropolitan statistical
area in which the consumer resides or the nearest area if the
consumer does not reside within a standard metropolitan statistical
area.
(b) A "high-cost" loan means a loan that is either of the
following:
(1) The annual percentage rate at consummation will exceed by more
than 5 percentage points the yield on Treasury securities having
comparable periods of maturity to the loan maturity as of the 15th
day of the month immediately proceeding the month in which the
application for the extension of credit is received by the creditor.
(2) The total points and fees payable by the consumer at or before
loan closing will exceed 5 percent of the total loan amount.
(c) The following lending practices are prohibited in the making
of high-cost loans:
(c) Predatory lending practices are prohibited in the making and
servicing of high cost loans. These practices include, but are not
limited to, the following:
(1) The making of a subsequent loan to refinance the original
loan, also known as "flipping," that results in no net
substantial economic benefit to the borrower.
(2) The selling of additional products in a loan agreement , also
known as "packing."
(3) The making of a loan without regard to the borrower's
monthly income and obligations. ability to repay,
considering the borrower's current and expected income, current
obligations, and employment status.
(4) The charging of fees for loan services that bear no reasonable
relationship to the value and cost of services actually
performed.
(d) (l) Before any person may provide real estate brokerage
services, as defined in Section 10131 of the Business and Professions
Code, to a borrower for a loan contract subject to this section, the
broker shall enter into a written loan brokerage contract with the
borrower that satisfies the requirement of this section.
(2) The loan brokerage contract shall contain an explicit
statement that the broker is acting as the agent of the borrower in
providing brokerage services to the borrower, and when acting as
agent for the borrower, the broker owes to that borrower a fiduciary
duty of utmost care, honesty, and loyalty in the transaction,
including the duty of full disclosure of all material facts. If the
broker is authorized to act as an agent for any other person relative
to the transaction, the loan brokerage contract shall contain a
statement of that fact and identification of that person.
(3) The loan brokerage contract shall contain a detailed
description of the services that the broker agrees to perform for the
borrower, and a good faith estimate of any fees the broker will
receive for those services, whether paid by the borrower, the
institutional lender, or both.
(4) The loan brokerage contract shall include a clear and
conspicuous statement of the conditions under which the borrower is
obligated to pay the broker for brokerage services rendered under the
contract.
(5) The loan brokerage contract shall provide that, if the broker
makes a materially false or deceptive
statement or omission about a fact that is material in the
inducement or implementation of the contract, a court may, in
addition to any other legal rights or remedies, do any of the
following:
(A) Rescind the loan brokerage contract.
(B) Award fees paid by the borrower to the broker for brokerage
services rendered by the broker pursuant to the loan brokerage
contract.
(C) Award actual costs, including attorney's fees, for enforcing
the borrower's rights under the loan brokerage contract.
(e) Any person who willfully violates any provision of this
section is guilty of a crime and shall, upon conviction, be punished
by a fine of not more than fifty thousand dollars ($50,000), by
imprisonment in a county jail for not more than one year or in the
state prison, or by both that fine and imprisonment.
SEC. 4. Section 3398 is added to the Financial Code, to read:
3398. (a) Notwithstanding any other provision of law, this
section shall apply to all high-cost residential mortgage loans and
consumer loans secured by liens on real property made or serviced by
a commercial or industrial bank to a consumer whose household
income is at or below 120 percent of the median household
income of the standard metropolitan statistical area in which
the consumer resides or the nearest area if the consumer does not
reside within a standard metropolitan statistical area.
(b) A "high-cost" loan means a loan that is either of the
following:
(1) The annual percentage rate at consummation will exceed by more
than 5 percentage points the yield on Treasury securities having
comparable periods of maturity to the loan maturity as of the 15th
day of the month immediately proceeding the month in which the
application for the extension of credit is received by the creditor.
(2) The total points and fees payable by the consumer at or before
loan closing will exceed 5 percent of the total loan amount.
(c) The following lending practices are prohibited in the making
of high-cost loans:
(c) Predatory lending practices are prohibited in the making and
servicing of high cost loans. These practices include, but are not
limited to, the following:
(1) The making of a subsequent loan to refinance the original
loan, also known as "flipping," that results in no net
substantial economic benefit to the borrower.
(2) The selling of additional products in a loan agreement , also
known as "packing."
(3) The making of a loan without regard to the borrower's
monthly income and obligations. ability to repay,
considering the borrower's current and expected income, current
obligations, and employment status.
(4) The charging of fees for loan services that bear no reasonable
relationship to the value and cost of services actually
performed.
SEC. 5. Section 7508 is added to the Financial Code, to read:
7508. (a) Notwithstanding any other provision of law, this
section shall apply to all high-cost residential mortgage loans and
consumer loans secured by liens on real property made or serviced by
a savings association to a consumer whose household income
is at or below 120 percent of the median household income
of the standard metropolitan statistical area in which the consumer
resides or the nearest area if the consumer does not reside within a
standard metropolitan statistical area.
(b) A "high-cost" loan means a loan that is either of the
following:
(1) The annual percentage rate at consummation will exceed by more
than 5 percentage points the yield on Treasury securities having
comparable periods of maturity to the loan maturity as of the 15th
day of the month immediately proceeding the month in which the
application for the extension of credit is received by the creditor.
(2) The total points and fees payable by the consumer at or before
loan closing will exceed 5 percent of the total loan amount.
(c) The following lending practices are prohibited in the making
of high-cost loans:
(c) Predatory lending practices are prohibited in the making and
servicing of high cost loans. These practices include, but are not
limited to, the following:
(1) The making of a subsequent loan to refinance the original
loan, also known as "flipping," that results in no net
substantial economic benefit to the borrower.
(2) The selling of additional products in a loan agreement , also
known as "packing."
(3) The making of a loan without regard to the borrower's
monthly income and obligations. ability to repay,
considering the borrower's current and expected income, current
obligations, and employment status.
(4) The charging of fees for loan services that bear no reasonable
to relationship to the value and cost
of services actually performed.
SEC. 6. Section 22168 is added to the Financial Code, to read:
22168. (a) Notwithstanding any other provision of law, this
section shall apply to all high-cost residential mortgage loans and
consumer loans secured by liens on real property made or serviced by
a finance lender to a consumer whose household income is
at or below 120 percent of the median household income of
the standard metropolitan statistical area in which the consumer
resides or the nearest area if the consumer does not reside within a
standard metropolitan statistical area.
(b) A "high-cost" loan means a loan that is either of the
following:
(1) The annual percentage rate at consummation will exceed by more
than 5 percentage points the yield on Treasury securities having
comparable periods of maturity to the loan maturity as of the 15th
day of the month immediately proceeding the month in which the
application for the extension of credit is received by the creditor.
(2) The total points and fees payable by the consumer at or before
loan closing will exceed 5 percent of the total loan amount.
(c) The following lending practices are prohibited in the making
of high-cost loans:
(c) Predatory lending practices are prohibited in the making and
servicing of high cost loans. These practices include, but are not
limited to, the following:
(1) The making of a subsequent loan to refinance the original
loan, also known as "flipping," that results in no net
substantial economic benefit to the borrower.
(2) The selling of additional products in a loan agreement , also
known as "packing."
(3) The making of a loan without regard to the borrower's
monthly income and obligations. ability to repay,
considering the borrower's current and expected income, current
obligations, and employment status.
(4) The charging of fees for loan services that bear no reasonable
relationship to the value and cost of services actually
performed.
SEC. 7. Section 50511 is added to the Financial Code, to read:
50511. (a) Notwithstanding any other provision of law, this
section shall apply to all high-cost residential mortgage loans and
consumer loans secured by liens on real property made or serviced by
a residential mortgage lender to a consumer whose household
income is at or below 120 percent of the median household
income of the standard metropolitan statistical area in which
the consumer resides or the nearest area if the consumer does not
reside within a standard metropolitan statistical area.
(b) A "high-cost" loan means a loan that is either of the
following:
(1) The annual percentage rate at consummation will exceed by more
than 5 percentage points the yield on Treasury securities having
comparable periods of maturity to the loan maturity as of the 15th
day of the month immediately proceeding the month in which the
application for the extension of credit is received by the creditor.
(2) The total points and fees payable by the consumer at or before
loan closing will exceed 5 percent of the total loan amount.
(c) The following lending practices are prohibited in the making
of high-cost loans:
(c) Predatory lending practices are prohibited in the making and
servicing of high cost loans. These practices include, but are not
limited to, the following:
(1) The making of a subsequent loan to refinance the original
loan, also known as "flipping," that results in no net
substantial economic benefit to the borrower.
(2) The selling of additional products in a loan agreement , also
known as "packing."
(3) The making of a loan without regard to the borrower's
monthly income and obligations. ability to repay,
considering the borrower's current and expected income, current
obligations, and employment status.
(4) The charging of fees for loan services that bear no reasonable
relationship to the value and cost of services actually
performed.
SEC. 8. No reimbursement is required by this act pursuant to
Section 6 of Article XIIIB 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 XIIIB of the California Constitution.