Criminal charges and jail time now part of predatory mortgage lending law in California

Assembly Bill 3108 expands the definition of mortgage fraud to include a loan originator who knowingly causes a borrower to sign for a loan that is unsuitable for their needs

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | November 25, 2024

Article originally posted in Orange County Register on November 21, 2024

Imagine you learn a family member has defrauded your mother of $800,000 in home equity — and that they did it with the help of an unscrupulous mortgage lender.

This is the story of Reginald Byron Jones-Sawyer Sr.’s mother. Jone-Sawyer tried to get help from the Los Angeles Police Department and the LA County District Attorney’s Office. Both told him the fraud was a civil matter.

LAPD also told him something shocking. This type of fraud isn’t unusual. The department said it gets four to five complaints a week regarding predatory lending, Jones-Sawyer told me.

Jones-Sawyer is also a California legislator, an assembly member for the 57th District in LA County.

He authored a bill that is perhaps the first of its kind in the United States. Assembly Bill 3108 expands the definition of mortgage fraud to include a loan originator who knowingly causes a borrower to sign a loan or document that is unsuitable for them, with the intent to defraud the borrower. This type of predatory mortgage lending is now a crime in California, punishable by up to one year in jail.

According to a Jones-Sawyer fact sheet issued, it’s almost impossible for victims of predatory lending to win a civil suit against predatory brokers because of the lack of clarity in the state statute and the contract nature of mortgages. These lenders are also not being prosecuted by district attorneys for the same reasons.

Material misstatement, misrepresentation, or omission of details are key points in this new fraudster law. Coaching a borrower to say cash-out funds are going to be used for X but are really going to be used for Y is on the expanded fraud definition.

For example, say you have $50,000 of credit card debt with an average 20% interest rate. Income is tight and you have marginal credit. You have a super-low 2.5% interest rate on a $300,000 mortgage for your primary residence. You don’t want to give that up. You also own a single-family rental home worth $500,000. Your rental property is free and clear of any liens. You apply for a business purpose mortgage because the income qualifying requirements for such a loan are nearly non-existent.

The loan is denied because paying off personal credit card debt is not a business purpose under mortgage lending rules.

A business purpose would be something like remodeling the rental or adding an accessory dwelling unit.

Now, you go to another mortgage originator who coaches you to claim that the money is for remodeling the rental, not paying off your consumer debt. Under the new law, that originator could spend up to one year in the pokey for directing that lie.

“This is the first time in history someone can go to jail under consumer protection laws,” said attorney Dennis Doss. “The state has weaponized the law.”

The real target of this law is the so-called hard moneylenders, according to Doss. Hard money or private money lenders charge 2 to 4 points, offer short-term loans of say three years or less and provide balloon payments. They add prepayment penalties. Interest rates are also higher than traditional property loans. Business purpose loans allow all of this.

Examples from Doss blur the lines of common sense for most mortgage brokers.

— Mom takes out a mortgage on her residence to buy her son a red truck to start his new business. Because it’s not her business, it’s not considered a business purpose loan.

— With no experience, a career schoolteacher wants to buy, fix-up and flip houses on the side. Nope.

From my perspective, the red truck example makes sense. But I was surprised by the schoolteacher scenario.

My advice: Every loan originator should sanity-check the borrower’s business reasons with the underwriter before taking the loan application. Obtain and keep for your records the documented underwriter response. Because what seems obvious to me as a business purpose loan may not be.

Generally, a business purpose loan is strictly business. Examples would be adding capital to your existing business for expansion purposes, an experienced landlord pulling cash out to purchase another property, or someone buying a related business.

This law may prevent unsuspecting borrowers from being victimized by predatory lenders. But it may also force others who are well qualified to sell because they can’t tap home equity.

Freddie Mac rate news: The 30-year fixed rate averaged 6.84%, 6 basis points higher than last week. The 15-year fixed rate averaged 6.02%, 3 basis points higher than last week.

The Mortgage Bankers Association reported a 1.7% mortgage application increase compared to one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $232 more than this week’s payment of $5,018.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.875%, a 15-year conventional at 5.75%, a 30-year conventional at 6.5%, a 15-year conventional high balance at 6.125% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year high-balance conventional at 6.75% and a jumbo 30-year fixed at 6.625%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego and Orange counties.

Eye-catcher loan program of the week: A 30-year mortgage, with 30% down, locked for the first 5 years at 5.875% with 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.