California lawmakers will allow the state’s Housing Finance Agency to take on another $2 billion in debt while criminalizing attempts to pressure appraisers and adopting federal guidance for subprime and “exotic” loans.
California Gov. Arnold Schwarzenegger promised this week to sign into law three separate bills affecting mortgage lending in the state, including legislation that would subject lenders licensed at the state level to guidance that had pertained only to federally chartered lenders.
The guidance advises lenders to provide more complete disclosure of loan terms, and to qualify borrowers at the fully indexed rate — assessing whether they will be able to afford their monthly payments even after interest rates reset.
The guidance for “exotic” interest-only and pay-option adjustable-rate mortgage (ARM) loans was issued to federally chartered lenders more than a year ago. It has since been adopted by 38 other states, according to the Conference of State Bank Supervisors (CSBS).
The federal guidance for subprime loans, including many types of ARM loans, was finalized June 29 and has been adopted by 29 states, according to a CSBS Web page tracking implementation at the state level.
CSBS is urging all states to adopt the federal guidance for subprime and exotic loans to address industry concerns that federally chartered institutions could otherwise be put in a competitive disadvantage to lenders regulated at the state level.
While some states adopted the guidance through administrative orders, others, including California, ended up drafting legislation to incorporate them into state law.
In California, Senate Bill 385 requires the state Commissioner of Financial Institutions to apply the guidance to all state-regulated financial institutions, including privately insured, state-chartered credit unions. The bill also requires the Commissioner of Real Estate and the Commissioner of Corporations to apply the guidance to real estate brokers and licensees.
Specified financial institutions, real estate brokers, finance lenders and those licensed under the California Residential Mortgage Lending Act are required “to adopt and adhere to policies and procedures that are reasonably intended to achieve the objectives set forth in the guidance,” and a “willful violation” would be a crime.
SB 385 — approved by both houses of the California legislature in the first week of September — expands the definition of real estate broker to include anyone who makes eight or more loans secured by residential real property a year from their own funds, requiring them to obtain a license to do so.
Schwarzenegger also promised to sign into law a bill that makes it a crime for anyone with an interest in a real estate transaction to attempt to influence an appraisal. That bill, SB 223, does not prohibit those with interest in a real estate transaction to ask an appraiser to consider “additional, appropriate property information,” or request “further detail, substantiation or explanation for the appraiser’s value conclusion.” The bill also allows for requests that errors in an appraisal report be corrected.
SB 223 broadens the definition of criminal activity by appraisers, making it a crime for appraisers to engage in appraisal activity in connection with the financing or development of real property if their compensation depends on the valuation they produce. California currently prohibits such links to compensation on appraisals connected to the sale, purchase or transfer of a property.
Schwarzenegger said he will also sign Assembly Bill 929, which raises by $2 billion the total debt that the California Housing Finance Agency (CalHFA) can take on through bond issues, to $13.15 billion. CalHFA issues bonds to finance housing for low- and moderate-income families.
According to a Senate analysis of the bill, CalHFA plans to provide $9.2 billion for home ownership and multifamily lending, and $3.6 billion in loan insurance through 2013. Without an increase in its debt cap, the agency was on track to bump up against its borrowing limit by early 2009.