The following are prohibited acts and limitations for covered
(a) (1) A covered loan shall not include a prepayment fee or
penalty after the first 36 months after the date of consummation of
(2) A covered loan may include a prepayment fee or penalty up to
the first 36 months after the date of consummation of the loan if:
(A) The person who originates the covered loan has also offered
the consumer a choice of another product without a prepayment fee or
(B) The person who originates the covered loan has disclosed in
writing to the consumer at least three business days prior to loan
consummation the terms of the prepayment fee or penalty to the
consumer for accepting a covered loan with the prepayment penalty and
the rates, points, and fees that would be available to the consumer
for accepting a covered loan without a prepayment penalty.
(C) The person who originates the covered loan has limited the
amount of the prepayment fee or penalty to an amount not to exceed
the payment of six months' advance interest, at the contract rate of
interest then in effect, on the amount prepaid in any 12-month period
in excess of 20 percent of the original principal amount.
(D) A covered loan will not impose the prepayment fee or penalty
if the covered loan is accelerated as a result of default.
(E) The person who originates the covered loan will not finance a
prepayment penalty through a new loan that is originated by the same
(b) (1) A covered loan with a term of 5 years or less may not
provide at origination for a payment schedule with regular periodic
payments that when aggregated do not fully amortize the principal
balance as of the maturity date of the loan.
(2) For a payment schedule that is adjusted to account for the
seasonal or irregular income of the consumer, the total installments
in any year shall not exceed the amount of one year's worth of
payments on the loan. This prohibition does not apply to a bridge
loan. For purposes of this paragraph, "bridge loan" means a loan with
a maturity of less than 18 months that only requires payments of
interest until the time when the entire unpaid balance is due and
(c) A covered loan shall not contain a provision for negative
amortization such that the payment schedule for regular monthly
payments causes the principal balance to increase, unless the covered
loan is a first mortgage and the person who originates the loan
discloses to the consumer that the loan contains a negative
amortization provision that may add principal to the balance of the
(d) A covered loan shall not include terms under which periodic
payments required under the loan are consolidated and paid in advance
from the loan proceeds.
(e) A covered loan shall not contain a provision that increases
the interest rate as a result of a default. This provision does not
apply to interest rate changes in a variable rate loan otherwise
consistent with the provisions of the loan documents, provided the
change in the interest rate is not triggered by the event of default
or the acceleration for the indebtedness.
(f) (1) A person who originates covered loans shall not make or
arrange a covered loan unless at the time the loan is consummated,
the person reasonably believes the consumer, or consumers, when
considered collectively in the case of multiple consumers, will be
able to make the scheduled payments to repay the obligation based
upon a consideration of their current and expected income, current
obligations, employment status, and other financial resources, other
than the consumer's equity in the dwelling that secures repayment of
the loan. In the case of a covered loan that is structured to
increase to a specific designated rate, stated as a number or
formula, at a specific predetermined date not exceeding 37 months
from the date of application, this evaluation shall be based upon the
fully indexed rate of the loan calculated at the time of
The consumer shall be presumed to be able to make the scheduled
payments to repay the obligation if, at the time the loan is
consummated, the consumer's total monthly debts, including amounts
owed under the loan, do not exceed 55 percent of the consumer's
monthly gross income, as verified by the credit application, the
consumer's financial statement, a credit report, financial
information provided to the person originating the loan by or on
behalf of the consumer, or any other reasonable means.
(2) No presumption of inability to make the scheduled payments to
repay the obligation shall arise solely from the fact that at the
time the loan is consummated, the consumer's total monthly debts,
including amounts owed under the loan, exceed 55 percent of the
consumer's monthly gross income.
(3) In the case of a stated income loan, the reasonable belief
requirement in paragraph (1) shall apply, however, for stated income
loans that belief may be based on the income stated by the consumer,
and other information in the possession of the person originating the
loan after the solicitation of all information that the person
customarily solicits in connection with loans of this type. A person
shall not knowingly or willfully originate a covered loan as a stated
income loan with the intent, or effect, of evading the provisions of
(g) A person who originates a covered loan shall not pay a
contractor under a home-improvement contract from the proceeds of a
covered loan other than by an instrument payable to the consumer or
jointly to the consumer and the contractor or, at the election of the
consumer, to a third-party escrow agent for the benefit of the
contractor in accordance with terms and conditions established in a
written escrow agreement signed by the consumer, the person who
originates a covered loan, and the contractor prior to the
disbursement of funds. No payments, other than progress payments for
home-improvement work that the consumer certifies is completed, shall
be made to an escrow account or jointly to the consumer and the
contractor unless the person who originates the loan is presented
with a signed and dated completion certificate by the consumer
showing that the home-improvement contract was completed to the
satisfaction of the consumer.
(h) It is unlawful for a person who originates a covered loan to
recommend or encourage a consumer to default on an existing consumer
loan or other debt in connection with the solicitation or making of a
covered loan that refinances all or any portion of the existing
consumer loan or debt.
(i) A covered loan shall not contain a call provision that permits
the lender, in its sole discretion, to accelerate the indebtedness.
This prohibition does not apply if repayment of the loan has been
accelerated in accordance with the terms of the loan documents (1) as
a result of the consumer's default, (2) pursuant to a due-on-sale
provision, or (3) due to fraud or material misrepresentation by a
consumer in connection with the loan or the value of the security for
(j) A person who originates a covered loan shall not refinance or
arrange for the refinancing of a consumer loan such that the new loan
is a covered loan that is made for the purpose of refinancing, debt
consolidation or cash out, that does not result in an identifiable
benefit to the consumer, considering the consumer's stated purpose
for seeking the loan, fees, interest rates, finance charges, and
(k) (1) A covered loan shall not be made unless the following
disclosure, written in 12-point font or larger, has been provided to
the consumer no later than three business days prior to signing of
the loan documents of the transaction:
CONSUMER CAUTION AND HOME OWNERSHIP COUNSELING NOTICE
If you obtain this loan, the lender will have a mortgage on your
home. You could lose your home, and any money you have put into it,
if you do not meet your obligations under the loan.
Mortgage loan rates and closing costs and fees vary based on many
other factors, including your particular credit and financial
circumstances, your earnings history, the loan-to-value requested,
and the type of property that will secure your loan. Higher rates and
fees may be justified depending on the individual circumstances of a
particular consumer's application. You should shop around and
compare loan rates and fees.
This particular loan may have a higher rate and total points and
fees than other mortgage loans and is, or may be, subject to the
additional disclosure and substantive protections under Division 1.7
(commencing with Section 4970) of the Financial Code. You should
consider consulting a qualified independent credit counselor or other
experienced financial adviser regarding the rate, fees, and
provisions of this mortgage loan before you proceed. For information
on contacting a qualified credit counselor, ask your lender or call
the United States Department of Housing and Urban Development's
counseling hotline at 1-888-995-HOPE (4673) or go to
www.hud.gov/offices/hsg/hcc/fc/ for a list of HUD-approved housing
You are not required to complete any loan agreement merely because
you have received these disclosures or have signed a loan
If you proceed with this mortgage loan, you should also remember
that you may face serious financial risks if you use this loan to pay
off credit card debts and other debts in connection with this
transaction and then subsequently incur significant new credit card
charges or other debts. If you continue to accumulate debt after this
loan is closed and then experience financial difficulties, you could
lose your home and any equity you have in it if you do not meet your
mortgage loan obligations.
Property taxes and homeowner's insurance are your responsibility.
Not all lenders provide escrow services for these payments. You
should ask your lender about these services.
Your payments on existing debts contribute to your credit ratings.
You should not accept any advice to ignore your regular payments to
your existing creditors.
(2) It shall be a rebuttable presumption that a licensed person
has met its obligation to provide this disclosure if the consumer
provides the licensed person with a signed acknowledgment of receipt
of a copy of the notice set forth in paragraph (1).
(l) (1) A person who originates a covered loan shall not steer,
counsel, or direct any prospective consumer to accept a loan product
with a risk grade less favorable than the risk grade that the
consumer would qualify for based on that person's then current
underwriting guidelines, prudently applied, considering the
information available to that person, including the information
provided by the consumer.
A person shall not be deemed to have violated this section if the
risk grade determination applied to a consumer is reasonably based on
the person's underwriting guidelines if it is an appropriate risk
grade category for which the consumer qualifies with the person.
(2) If a broker originates a covered loan, the broker shall not
steer, counsel, or direct any prospective consumer to accept a loan
product at a higher cost than that for which the consumer could
qualify based on the loan products offered by the persons with whom
the broker regularly does business.
(m) A person who originates a covered loan shall not avoid, or
attempt to avoid, the application of this division by doing the
(1) Structuring a loan transaction as an open-end credit plan for
the purpose of evading the provisions of this division when the loan
would have been a covered loan if the loan had been structured as a
closed end loan.
(2) Dividing any loan transaction into separate parts for the
purpose of evading the provisions of this division.
(n) A person who originates a covered loan shall not act in any
manner, whether specifically prohibited by this section or of a
different character, that constitutes fraud.