News Archive

News Archives

Conforming Loan Limits Temporarily Increased

On February 13, 2008, President Bush signed into law the Economic Stimulus Act of 2008 (H.R. 5140). In
addition to providing economic stimulus in the form of income tax credits to individuals, the bill
temporarily increases the caps on mortgage loans eligible for (i) purchase by Fannie Mae and Freddie Mac
(the “GSEs”), and (ii) insurance by the Federal Housing Administration. Under the bill, (i) GSE
conforming loan limits are increased to 125% of the area median home price (up to a maximum of 175% of
the previously determined 2008 limit), and (ii) the caps for FHA insurance in “high cost areas” are
increased to 125% of the area median home price (with discretionary authority granted to HUD to
increase those caps by up to an additional $100,000). These increases will take conforming loan limits up
to $729,750 in high cost areas like California.

The increases apply to mortgage loans originated during the period beginning on July 1, 2007 and ending
on December 31, 2008. Loans originated during this time period will continue to be eligible for purchase
by the GSEs during the entire term of the mortgage even if the purchase occurs after December 31, 2008.

Although the increases are temporary, many believe that it will be difficult to roll them back in the
future. Only time will tell. The full text of the bill can be found here.

For more information, please contact Christian Law Group
Intelligent Advice. Sound Solutions.

California Subprime Lending Reform Act to be Introduced in the Assembly

The regulatory frenzy resulting from the recent collapse of the subprime residential mortgage market
continues unabated. This week in California, Assembly Member Ted Lieu introduced a bill before the
Assembly titled the “California Subprime Lending Reform Act” (AB 1830). In its present form, this bill
substantially expands the scope of the existing “covered loan” law and imposes additional requirements
and restrictions on both originators and borrowers alike. Here are some of the highlights:

•        The bill redefines “covered loans” as “high-cost loans” and expands the definition to include(i) first
lien loans whose APR exceeds the yield on comparable Treasury securities by 8% or more, (ii)
subordinate lien loans whose APR exceed comparable Treasury yields by 10% or more, and (iii) loan
transactions where points and fees exceed 5% of the total loan amount.
•        The bill defines “subprime” mortgage loans to include (i) first lien, closed end loans where the APR
exceeds the yield on comparable Treasury securities by 3% or more, and (ii) subordinate lien, closed end
loans where the APR exceeds the yield on comparable Treasury securities by 5% or more;
•        Open end credit plans, whether secured by first or subordinate liens, will be considered
“subprime” if the APR exceeds the yield on comparable Treasury securities by 3% or more.
•        First lien loans whose APR exceeds the annual yield on conventional mortgages by 1.75% or more,
and subordinate lien loans whose APR exceeds such yield by 3.75% or more, will be considered
“subprime” loans.
•        “Points and fees” is redefined to include “all compensation paid directly or indirectly to a
mortgage broker from any source, including, but not limited to, any payment of a yield spread premium.”
•        Prepayment penalties are prohibited in connection with high-cost loans.
•        High-cost loans must be fully amortizing.
•        High cost loans may not provide for negative amortization.
•        An increased rate of interest may not be charged upon default of a high-cost loan.
•        At loan consummation, loan originators must “reasonably believe” that a borrower can repay high-
cost loans at the fully-indexed rate. A borrower will be presumed capable of repaying the loan if his or
her debt-to-income ratio is less than 45%.
•        Stated income high-cost loans are prohibited.
•        A consumer loan may not be refinanced as a high-cost loan absent a “net tangible benefit” to the
borrower.
•        Incentive compensation, including yield spread premiums, are prohibited in connection with the
origination of high-cost loans.
•        Impound accounts are required for high-costs loans for a minimum of five (5) years or until private
mortgage insurance is not necessary.
•        Consumer counseling for borrowers is required for high-costs loans.
•        At loan consummation, loan originators must “reasonably believe” that a borrower can repay a
subprime or nontraditional loan on schedule, including the payment of taxes and insurance. This
determination cannot be based solely upon the borrower’s stated ability to pay.
•        A borrower will be presumed unable to repay a subprime or nontraditional loan if his or her debt-
to-income ratio at loan consummation exceeds 45%. However, a borrower will not be presumed to have
the ability to repay the loan solely because his or her debt-to-income ratio is less than 45%.
•        Prepayment penalties are prohibited in connection with subprime and nontraditional loans.
Adjustable rate loans which are neither subprime loans nor nontraditional loan may not impose a
prepayment penalty within six (6) moths of the first rate adjustment.
•         A consumer loan may not be refinanced as a subprime or nontraditional loan absent a “net
tangible benefit” to the borrower.
•        For a period of one (1) year after consummation, neither the loan originator nor any person
holding a subprime or nontraditional loan may directly market or initiate communication with the
borrower regarding refinancing.
•        Incentive compensation, including yield spread premiums, are prohibited in connection with
subprime and nontraditional loans which bear interest rates above the wholesale par rate for which the
borrower qualifies.
•        An increased rate of interest may not be charged upon default of a subprime or nontraditional loan.
•        Impound accounts are required for subprime and nontraditional loans for a minimum of five (5)
years or until private mortgage insurance is not necessary.
•        A “Consumer Caution Notice” must be given to borrowers receiving subprime and nontraditional
loans three (3) business days prior to funding.
•        Subprime and nontraditional loans may not provide for negative amortization.
•        The bill increases the maximum penalty for violations of the Act to $10,000 per violation.
•        Provisions in loan documents that violate the Act are deemed to be unenforceable.
•        The bill provides for a private right of action to borrowers for violations of the Act.
•        Certain forum selection clauses are considered void as against public policy.
•        Violations of the Act are defenses to any action to foreclose a high-cost, subprime or nontraditional
loan.

If signed into law, this bill will apply to all high-cost, subprime and nontraditional loans originated in
California on or after January 1, 2009.

The text of the bill can be found here.

For more information, please contact Christian Law Group.
Intelligent Advice. Sound Solutions.