Article 6. Real Estate Loans of California Financial Code >> Division 2. >> Chapter 6. >> Article 6.
(a) Subject to limitations, if any, within this chapter, an
association may originate, invest in, sell, purchase, service,
participate, or otherwise deal in (including brokerage or
warehousing) loans, including construction loans, made on the
security of residential or nonresidential real property, or interests
in these loans.
(b) No investment in real property or a real estate loan shall be
made by an association until one or more written appraisal reports,
prepared at the request of an association or its agent, have been
submitted to the association by a person or persons meeting the
qualification standards for an appraiser as set forth in the
commissioner's regulations. No commitment to disburse shall be made
by the association until the person or persons have been duly
appointed and qualified as appraisers by the association. Such a
person or persons shall have made a physical inspection and submitted
to the association a fully documented appraisal of the real estate
that would secure the loan or constitute the investment, or, in the
case of a purchased loan, the person or persons have reviewed and
approved an appraisal report in support of the loan. If the balance
of any purchased loan is one million dollars ($1,000,000) or more,
the person or persons reviewing and approving the appraisal report
shall have inspected the real estate. Each appraisal report submitted
to an association pursuant to this subdivision shall be signed and
shall include the tax identification number, social security number,
or other form of verifiable identification of the person or persons
signing the appraisal report.
(c) For the purpose of determining appraised value, unimproved
property without offsite improvements shall be evaluated as though
offsite improvements have been installed if a subdivision map has
been recorded and a bond or other instrument guaranteeing
installation of the offsite improvements has been accepted by the
governing authorities in connection with the recording of the
Each real estate loan shall be evidenced by a note or
instrument of obligation for the amount of the loan. The note or
instrument shall specify the amount and terms of repayment including
any penalty or charge for late payment, and may contain all other
terms of the loan contract.
(a) Each real estate loan shall be secured by a deed of
trust, mortgage, or other transaction or instrument constituting a
lien or claim, or its equivalent, upon the real estate securing the
loan, according to any lawful and recognized practice that is suited
to the transaction. Any deed of trust or other instrument or
transaction constituting a lien or claim is included in the term
"mortgage" in this division.
(b) A mortgage shall provide specifically for full protection to
the association with respect to the loan and additional advances,
including any terms and conditions that the association deems
necessary and appropriate to state the agreement between the parties.
Except as specified by the loan contract or by Section 2954.8
of the Civil Code, an association shall have no obligation to pay
interest to the borrower upon funds credited to an impound, trust, or
other type of account for payment of taxes, insurance, or other
charges relating to the property, or to invest them for the benefit
of the borrower, unless the funds have been placed in an interest
bearing savings account under the terms of the loan contract.
Notwithstanding any other provision of law, an association
may adjust the interest rate, payment, balance, or term-to-maturity
on any loan secured by real property as authorized by the loan
contract, and may receive a portion of the consideration for making a
real estate loan in the form of a percentage of the amount by which
the current market value of the property during the loan term or at
maturity exceeds the original appraised value, subject to the
limitations of subdivision (b) and Section 341 of P.L. 97-320 (H.R.
6267, the Garn-St. Germain Depository Institutions Act of 1982).
(a) For the purposes of this section:
(1) "Fully amortized loan" means a loan in which, at inception of
the loan, the entire principal balance, together with accrued
interest, shall be payable with the scheduled term of the loan in
substantially equal installments (excepting the last payment, which
may be smaller than a regular scheduled payment).
(2) "Home loans" means loans made on the security of one- to
four-unit residential dwellings (including condominiums and
cooperatives), combinations of these dwellings and business property
(where no more than 20 percent of the total appraised value of the
real estate is attributable to the business use), farm residences and
combinations of farm residences and commercial farm real property.
(3) "Nonamortized loan" means a loan in which none of the
principal balance shall be payable prior to the maturity of the loan.
(4) "Open end line of credit" means a loan plan in which the
association reasonably contemplates repeated transactions; the
association may impose interest from time to time on the unpaid
principal of the loan plan, and the amount of credit that may be
extended to the borrower during the term of the loan plan (up to any
limit set by the association) is generally made available to the
extent that any outstanding principal balance is repaid.
(5) "Partially amortized loan" means a loan in which some but not
all of the principal balance, together with accrued interest, shall
be payable prior to the maturity of the loan.
(6) "Reverse annuity mortgage" means an instrument which provides
for periodic payments to be made to a homeowner based on accumulated
equity. The payments are made monthly directly by the association, or
are made through the purchase of an annuity from an insurance
company. The loan becomes due on a specified date after disbursement
of the entire principal amount of the loan or when a specified event
occurs, such as sale of the property or death of the borrower. The
interest rate on this instrument may be fixed, or may be adjusted
periodically as provided by this section.
(b) Adjustments to the interest rate, payment, balance, or
term-to-maturity on home loans shall be subject to the limitations of
(1) The loan term shall not exceed 40 years, with interest payable
at least semiannually, except as expressly authorized by this
(2) The loan balance for other than nonamortized and open end line
of credit loans shall be repayable in at least semiannual
installments; provided, that loans on the security of farm residences
and combinations of farm residences and commercial farm real
property may be repayable in annual installments.
(3) The loan may be fully amortized, partially amortized,
nonamortized, a reverse annuity mortgage, or an open end line of
credit loan. The loan contract may provide for the deferral of
principal and capitalization of a portion of interest, or of all
interest, in the case of loans to natural persons secured by
borrower-occupied real property and on which periodic advances are
(4) (A) At origination, the loan-to-value ratio may not exceed the
maximum permitted by Section 7509, as determined by the association'
s board of directors (but not more than 100 percent). During the term
of the loan, the loan-to-value ratio may increase above the maximum
percentage otherwise permissible if the increase results from an
adjustment described in paragraph (3) or (5). The commissioner shall
assume continued compliance with applicable loan-to-value limitations
where the original loan-to-value ratio met the requirements of this
paragraph, but in no event may the loan balance exceed 125 percent of
the original appraised value of the security property during the
term of the loan unless pursuant to clause (i) of subparagraph (B) of
paragraph (5) of subdivision (b) or unless the loan contract
provides that the payment shall be adjusted at least once every five
years, beginning no later than the 10th year of the loan, to a level
sufficient to amortize the loan at the then existing interest rate
and loan balance over the remaining term of the loan. However, this
125 percent limitation shall not apply to the portion of a loan
balance that is interest received in the form of a percentage of the
appreciation in value of the security property.
(B) If, at maturity of a loan secured by a home that provides for
adjustments pursuant to paragraph (3) or (5), the ratio of the loan
balance to the current market value of the security property exceeds
the maximum permissible amount under Section 7509, the association
may offer to refinance the loan if (i) the refinanced loan complies
with subdivision (b) of Section 7509 and (ii) the loan contract for
the refinanced loan requires that, in addition to full or partial
amortization of the loan, the pro rata portion, based on the number
of installments due annually, of estimated annual taxes and
assessments on the security property be paid in advance to the
association with each installment payment.
(5) For any home loan secured by borrower-occupied property or
property to be occupied by the borrower, adjustments to the interest
rate, payment, balance, or term-to-maturity shall comply with the
limitations of this paragraph.
(A) Adjustments to the interest rate shall correspond directly to
the movement of an interest rate index or of a national or regional
index that measures the rate of inflation or the rate of change in
consumer disposable income, which index is readily available to, and
verifiable by, the borrower and is beyond the direct control of the
association. An association also may increase the interest rate
pursuant to a formula or schedule that specifies the amount of the
increase and the time at which it may be made and which is set forth
in the loan contract. An association, in its sole discretion, may
decrease the interest rate at any time.
(B) Adjustments to the payment and the loan balance that do not
reflect an interest rate adjustment may be made if: (i) the
adjustments reflect a change in a national or regional index that
measures the rate of inflation or the rate of change in consumer
disposable income, is readily available to and verifiable by the
borrower, and is beyond the direct control of the association; (ii)
in the case of a payment adjustment, the adjustment reflects a change
in the loan balance or is made pursuant to a formula, or to a
schedule specifying the percentage or dollar change in the payment as
set forth in the loan contract; or (iii) in the case of an open end
line of credit loan, the adjustment reflects an advance taken by the
borrower under the line of credit, or a payment made by the borrower,
that is permitted by the loan contract.
(C) Any combination of indices or a moving average of index values
may be used as an index, and an association (i) may use more than
one index during the term of a loan, if set forth in the loan
contract and (ii) may provide for the selection of a substitute index
by the association in the event the index being used is no longer
available to or verifiable by the borrower or as otherwise provided
in the loan contract.
(D) The loan term may be adjusted only to reflect a change in the
interest rate, the payment or the loan balance. A loan contract may
provide an association with the right to call the loan due and
payable either after a specified period of time has elapsed following
the date of the loan contract or as specified in a reverse annuity
(6) For any home loan secured by borrower-occupied property and on
which the interest rate may be adjusted pursuant to paragraph (5),
an association may not impose a prepayment charge on any prepayment
made within 90 days of a required notice of an interest-rate increase
with respect to the loan.
(c) Disclosure and notices for loans made pursuant to this section
shall comply with the regulations codified in Section 563.99 of
Title 12 of the Code of Federal Regulations.
(a) Notwithstanding any other provision of law, an
association may originate, invest in, sell, purchase, service,
participate, or otherwise deal in loans (including construction
loans) on the security of real property for primarily residential
(other than a one- to four-unit dwelling) or nonresidential use,
subject to the limitations of this article.
(b) An association's aggregate investment in real property loans
for primarily nonresidential use under this section shall not exceed
40 percent of assets.
(a) A savings association may make loans the principal
purpose of which is to provide financing with respect to what is, or
what is to become, primarily residential real estate, for which the
association relies substantially on the borrower's general credit
standing and projected future income for repayment, without other
security, or relies on other assurances for repayment, including
guarantees or other obligations of third parties.
(b) An association's aggregate investment in residential real
estate loans described in subdivision (a) shall not exceed an amount
equal to 5 percent of the association's assets.
Notwithstanding any other provision of the law, an
association may make a loan secured by an assignment of a loan or
loans to the extent that it could, under applicable law and
regulations, make or purchase the underlying assigned loan or loans.
(a) An association may make loans or advances of credit, or
invest in interests therein, on the security of real property, which
loans, advances of credit, or investments are not otherwise
authorized under the law because of the following reasons:
(1) The loan-to-value ratio, stated maturity, or loan amount is in
excess of the maximum allowable limits.
(2) Lack of any required borrower certification or required
private mortgage insurance.
(3) The loan would cause an applicable percentage-of-assets
category to be exceeded.
(4) A combination of the foregoing factors.
(b) Investments made under the authority of this section are
subject to the following restrictions:
(1) No association shall have investments under this section
aggregating at any one time more than 5 percent of its total assets.
(2) Each investment made under this section shall be fully
documented to support the conclusion that it was made on a prudent
(3) Loans made pursuant to this section shall comply with
subparagraph (D) of paragraph (5), and paragraph (6), of subdivision
(b), of Section 7504, where applicable.
(a) (1) At the time of origination, a real estate loan may
not exceed 100 percent of the market value of security property. An
association shall, by vote of its board of directors, establish
maximum loan-to-value ratios for loans made on the security of real
estate, and the resolution adopting those ratios shall be included in
the minutes of the directors' meeting. Home loans, as defined in
Section 7504, made on the combined security of real estate and
savings accounts may be made in excess of the maximum loan-to-value
ratios adopted pursuant to this subdivision with the excess secured
by the savings account.
(2) However, for loans originated in excess of 90 percent of the
initial appraised value of the security property, the savings account
shall consist only of funds belonging to the borrower, the borrower'
s family, or the borrower's employer, and the loans shall not exceed
the appraised value of the real estate.
(b) With respect to home loans originated or refinanced in excess
of 90 percent of the appraised value of the security property, that
part of the unpaid balance that exceeds 80 percent of the property
value shall be insured or guaranteed by a mortgage insurance company
that the Federal Home Loan Mortgage Corporation has determined to be
a "qualified private insurer."
(c) With respect to all other loans on the security of real estate
originated in excess of 90 percent of the appraised value of the
security property, an association's board of directors shall approve
each of these loans prior to its origination and that approval shall
be recorded in the minutes of its meeting.
(d) An association shall not make a loan secured by unimproved
real property if the loan-to-value ratio would exceed 80 percent of
the appraised value of the unimproved real property securing the
(e) In determining compliance with maximum loan-to-value-ratio
limitations for real estate loans, at the time of making a loan, an
association shall add together the unpaid amount, or in the case of a
line-of-credit loan, the approved credit limit, of all recorded
loans secured by prior mortgages, liens, or other encumbrances on the
security property that would have priority over the association's
lien, and shall not make the loan unless the total amount of those
loans, including the loan to be made but excluding loans that will be
paid off out of the proceeds of the new loan, does not exceed the
applicable maximum loan-to-value-ratio limitations prescribed in this
subdivision. In determining the value of the real estate security,
an association shall use the current appraised value of the security
property, which may include any expected value of improvements to be
(f) "Value" for a real estate loan means the market value of the