California Legislators to Consider Sweeping Mortgage Reform

Something tells me it’s about to get a whole lot tougher to be a mortgage broker in the Golden State. While Federal efforts at mortgage reform seem to have stalled, Housing Wire has learned that California Assemblyman Ted Lieu is set to introduce sweeping reform to statewide mortgage legislation. His bill, AB1830 – the Subprime Lending Reform Act – will seek to outlaw negative amortization mortgages and stated income lending, while placing tough new restrictions on when yield spread premium would be allowed. Via an anonymous source, who suggested the bill could be unveiled as early as Thursday, HW obtained an advance copy of proposed changes to California’s Financial Code as part of AB1830, which would amend the state’s current law regulating so-called “covered loansâ€? – conforming loans where rates are eight percentage points above the yield on US Treasuries, or loans with points and fees that exceed 6 percent. The proposed bill seeks to extend the state’s regulatory authority to loans where the APR is as little as three percentage points above the Treasury yield, and to non-traditional mortgages as well, including interest-only and option ARM products. In addition to outlawing option ARM mortgages altogether, the bill would essentially eliminate stated-income lending for high-cost, subprime and non-traditional mortgages — the bill’s language says stated income applications must be “verified,â€? which really means they aren’t stated at all. The bill would also outlaw YSP as a method of compensation for high-cost, subprime and non-traditional mortgages. The use of YSP in all other mortgages (including, ostensibly, prime originations) would be limited by establishing a rate ceiling of 200 basis points above par, and only permitting the use of YSP whenever it is the broker’s sole form of compensation on a loan. For high-cost mortgages in particular, the bill would outlaw balloon payments and prepayment penalties, as well as requiring full borrower documentation. The bill would also require certification of third-party counseling “on the advisability of the loan transactionâ€? from a HUD-approved agency prior to origination. AB1830 would also prohibit brokers, lenders and servicers from engaging in direct marketing designed to get a consumer to refinance out of an existing subprime or non-traditional loan within 12 months of closing on a purchase or prior refinance, although borrowers may still inquire regarding refinancing opportunities.