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Re: CA's predatory lending law
Posted by Christine on February 09, 2004 at 9:35 AM
In Reply to: CA's predatory lending law posted by Ward-CA- on November 25, 2003 at 11:17 AM
Hi Ward, This information is very helpful. I knew there must be laws protecting homeowners from being abused like this.
My friend owns two properties both just getting ready to hit foreclosure. Her properties are in a prime real estate area of the Silcon Valley. She owed 135K on one property valued at 525K, and 200K on the second property which valued at 800K She was offered a cash loan to bring both current loans up to date. These loans had 35K plus 6% to the lender, written in. This loan was contingent on the sale of her Cupertino property(8OOK). It was also written that she would be obligated to list the sale of this property to a named broker. She, however, got to name the asking price. The broker was to get X% if he brought in the buyer, and X % if she brought in the buyer. The asking price was 789K, the first day it was listed on the MLS, both she and the broker brought in buyers. Hers was offering 765K cash now deal, and the broker brought in 2 offers one from a couple at 800K, and the other from a Construction Company at 812K. She instructed the broker to counter at 820K to them all, and nothing changed. She was not allowed to contact her buyer directly, and has since found out that the
counter was never made to him. He railroaded her at her home on a Saturday evening and applied pressure so strongly, telling her that this was a good offer and she was going to take it! She finally broke down and signed the offer. She litterally went down the hall, and spoke to a longtime friend, and minutes later, came back into the room and said, that she changed her mind and she wanted to consider the offers until 6PM on Sunday. The broker said " too bad, you already signed. it's a done deal". She was floored and is very angry and upset. Any guidance or advice for her? There are so many people involved in this deal, the "finder", who she's known and trusted most of her adult like, get's to split the commission with the Broker who is getting a double-ended comm. from (he brought the buyer), along with the $$ from the Buyer, a construction company who get's the property which people are fighting over
because of the areas availability, plus, the broker gets to list the home that is built by Cupertino Construction and I imagine there are other plus' for this broker working exclusively with this builder (I'm only guessing). The lender was also brought in by the "finder"... I'm sure there must be some kick back to the trusted "finder" to bring her in locking in that 35K and I believe it was 6%. Anyway, any recourse? Although the offer is a good offer, the Broker has acted unprofessionally, and doesn't seem to be interested in what she wants at all. Any ideas? Christine
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: : Ward, : : where can I find the Ca preditory lending laws? : : I am setting a money partner up to lend to someone in NOD and I wanted to read thru the laws. : :
: : thanks! : : Zachary : =?=?=?=?=?=?=?=?=?=?= : Zack, : Here's a summary of CA's predatory lending laws.
: Summary of California Anti-Predatory Lending Legislation
: September 2001
: Predatory home loans do tremendous damage to individual borrowers and their families, and to entire communities. They rob borrowers of the equity in their homes, of their peace of mind as they struggle to pay unaffordable mortgagees or face the loss of their homes, and in the worst cases lead to a forced sale or foreclosure. They can turn the dream of home ownership into a nightmare. The threat is particularly serious if we consider the fact that for most Americans the equity in their homes represents the majority of their lifetime's accumulated wealth. : Predatory loans are primarily found in the subprime market, which has grown more than 1000% in the last 10 years. Subprime loans come with higher interest rates and fees that are supposed to reflect the impaired credit records of borrowers, but industry figures estimate that upwards of 35% of subprime borrowers could have gotten a loan at 'A' rates. Even for borrowers with impaired credit, these higher rate loans are often also loaded with abusive features - like high fees, large and extended prepayment penalties, and financed single premium credit insurance - that cost borrowers even more money, and can lock them into the higher rates. These abuses affect borrowers of all races and income levels, but they are most heavily concentrated in minority communities, and among senior citizens and lower and moderate income borrowers who can least afford it. : At the urging of California ACORN and other organizations, including Consumers Union and the AARP, the California Assembly and Senate recently approved legislation, AB 489, to prohibit or regulate some of the most abusive predatory lending practices in California. Assuming Governor Davis follows through on his public commitment to sign the bill into law, all of the legislation's provisions are scheduled to go into effect on July 1, 2002. This legislation is the product of compromise and will not eliminate predatory lending abuses in California but will provide many useful protections for consumers. :
: Summary of AB 489 (as amended by AB 344) : All home loans: : Financing of Credit Insurance.
: On all home loans, the bill prohibits the financing of single premium credit insurance policies into the loans. Financing credit insurance into mortgages is considered one of the most damaging predatory practices because doing so racks up extra interest charges, inflates the loan amounts and the origination fees, and makes life insurance unaffordable in the long run. Lenders often do not even tell borrowers that these policies are financed into their loans and, in other cases, lead borrowers to believe that their loans will not be approved without the policies. : This prohibition does not affect private mortgage insurance, but instead applies to credit life, disability, or involuntary unemployment insurance where the insurance covers the repayment of the debt, rather than providing a payment to the holder of the policy like standard insurance policies. Credit insurance policies on home loans may still be sold as long as they are paid off monthly like other insurance. California's prohibition on financing credit insurance would follow the recommendation of last year's HUD/Treasury report on predatory lending, a similar provision in North Carolina's 1999 anti-predatory lending law, and Freddie Mac and Fannie Mae's refusal to purchase loans with financed single premium credit insurance. : Covered loans.
: The legislation's other protections apply to home loans with very high fees and rates when the total loan amount is $250,000 or below. Loans with either an annual percentage rate (APR) of eight percentage points over the Treasury bond rate or 'points and fees' (including any yield-spread premiums, which are kickbacks lenders pay to brokers in exchange for their jacking up a loan's interest rate) in excess of six percent of the total loan amount are considered covered loans by the bill. For borrowers in these higher-cost home loans, the bill extends additional consumer protections against some of the most abusive practices. :
: The bill provides the following protections on covered loans: : Financing of Points and Fees.
: The bill prohibits the financing of lender and broker fees beyond 6% of the original loan amount, minus the fees themselves. Financing huge fees into loans hides the actual cost of credit in the small print, strips borrowers of the equity in their homes that they can never recover, and inflates the borrower's indebtedness and monthly payment amounts. Compared to loans in the 'A' market that typically include 1% to 1.5% of the loan amount in fees directly to the lender, predatory loans frequently include fees of 7% or higher, running up to $15,000 or more. This equity is permanently stripped from the borrower. Although 6% remains a substantial sum to be financed into a loan, the bill will prevent some of the worst abuses. : Steering.
: Today, brokers and loan officers often earn additional incentives on a loan deal specifically for putting borrowers into loans with higher rates and/or higher fees than what they should qualify for. The bill prohibits borrowers in covered loans from being steered or counseled into loans with rates above what is appropriate for their credit risk, according to the lender's classifications. : Ability to Repay.
: The bill prohibits lenders from making a covered loan that they know the borrower cannot repay. In the absence of this protection, high up-front fees and other transaction costs, internal lender compensation systems based on volume, and escalating home values that can make foreclosure a winning proposition for some lenders all create incentives to make loans to borrowers who clearly will not be able to repay them. As a result, senior citizens on fixed incomes who once owned their own homes free and clear have ended up with house payments of 60% and more of their monthly income, and with not enough left over to pay for basic necessities. : Home Improvement Contracts.
: One large source of problem loans is unscrupulous home improvement contractors who arrange high cost loans to cover work they peddle door to door, then take the checks and leave the work shoddily done or not done at all. The bill prevents home improvement contractors from getting paid directly out of the proceeds of covered loans. It says that loan proceeds must go directly to the borrower, or otherwise must be paid out to an escrow account or to the borrower and contractor jointly only in increments with written certification that the work has been finished. : Fiduciary Responsibility of Brokers.
: The legislation establishes that any mortgage broker providing a covered loan has a responsibility to protect the borrower's financial interests, regardless of any of the broker's other financial relationships (including their status as an agent of the lender), and that any violation of those duties constitutes a violation of the law. : Loan Flipping.
: Some of the worst predatory abuses involve refinance loans where borrowers are put in new loans that leave them worse off in every way. Borrowers with 8% interest rate mortgages are refinanced into loans at 13% or 14% and charged high fees and transaction costs for the privilege. The bill would prevent the very worst such abuses by prohibiting covered loans where there is no clear benefit to the borrower, taking into account the costs of the loans, but also the borrower's reasons for seeking it. : Prepayment Penalties.
: When a prepayment penalty is included in a loan, the borrower must pay a penalty to refinance out of that loan into another loan within a certain time period. In the prime market, prepayment penalties are generally accompanied by a slightly lower interest rate on the loan. But in the subprime market, these penalties are commonly used to trap borrowers at higher interest rates than they should be paying or force them to pay an extra fee to receive a loan with a more reasonable interest rate. The bill sets very modest restrictions on some of the worst abuses - limiting such penalties on covered loans to no longer than three years and requiring the originator to offer a choice of a loan without a prepayment penalty at least three days before closing. : Balloon Payments.
: No balloon payments are allowed in the first five years of the loan, as in the federal Home Ownership Equity Protection Act (HOEPA). : Negative Amortization.
: The principal amounts of second mortgages may not increase over the course of a covered loan. : Prepaid Payments.
: Prepaid installments may not be financed into the loan, resulting in extra interest charges. : Call Provisions.
: Call provisions, which permit the lender to call in the entire balance of the loan immediately, may not be included in covered loans. : Interest Rate Changes Upon Default.
: The interest rate may not increase as a result of the borrower defaulting. : Encouragement of Default.
: A lender or broker may not encourage a consumer to default on the consumer's existing home loan when soliciting to refinance the consumer into a new covered loan. : Disclosures.
: Originators of covered loans are required to provide borrowers with one page of disclosures about the availability of loan counseling services and other information about the loan. :
: Enforcement: : Private Right of Action.
: To help enforce the bill's protections, borrowers whose loans are made in violation of the bill are able to file a lawsuit and receive the amount of actual damages for any violation, plus attorney's fees and costs, from the lender or broker. : If the violation is found to be willing and knowing, the award for each violation shall be $15,000 or actual damages, whichever is greater, plus attorney's fees and costs.
: The court may also award punitive damages if it finds that such damages are warranted. : Civil Actions by State Agencies.
: In cases pursued by the appropriate state licensing agency or the California Attorney General, any knowing and willful violation by a lender or broker shall be punishable by a maximum civil penalty of $25,000 per violation, plus reasonable attorney's fees and investigative costs. : Other violations are subject to a maximum administrative of $2,500 per violation. : The licensing agency may include a claim for relief for borrowers in addition to the penalties, including a claim for restitution, which shall be decided upon by the court. Subject to appropriation by the legislature, fines collected shall be used for education and enforcement efforts in connection with abusive lending practices. : Licensing Actions by State Agencies. : Any violation of the bill's protections shall be considered a violation of the relevant licensing law. : Lenders or brokers found to have committed a knowing and willful violation shall be subject to suspension of their license and possibly, after a second such violation, permanent revocation of their license. : Loan Terms Made Unenforceable.
: Particular loan terms which violate the bill's protections are unenforceable, regardless of whether the lender has sold the loan or not. The courts may issue orders to reform any terms of a loan to bring the loan into compliance with the law.
: Hope this helps.
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