California "Covered Loan Law" +11California · Real Estate · English

California's Covered Loan Law (Financial Code Section 4970 et seq., effective July 1, 2002) protects borrowers of High-Cost Loans secured by 1-4 unit residential property used as their principal residence. Test 1: original principal balance not exceeding the conforming FNMA loan limit. Test 2: APR more than 8% over comparable Treasury Securities (both senior and junior). Test 3: total points and fees exceeding 6% of the total loan amount. Bridge loans and reverse mortgages are excluded.

• ✓A Covered Loan must be secured by a 1-4 unit dwelling used as the borrower's principal residence
• ✓California's APR threshold is 8% over Treasury Securities for both senior and junior loans
• ✓The points and fees threshold is 6% of the total loan amount (more restrictive than federal 8%)
• ✓Bridge loans and reverse mortgages are excluded from Covered Loan status

MLBs/MLOs who arrange Covered Loans are fiduciaries of the borrower; violation of fiduciary duties violates applicable law. Brokers delivering Covered Loans to private investors/lenders are dual agents whose status must be disclosed and consented to by each principal. Brokers are agents and fiduciaries of borrowers and private lenders regardless of the transaction; they are NOT mere facilitators.

• ✓MLBs arranging Covered Loans owe fiduciary duties to borrowers regardless of other agency relationships
• ✓Dual agency must be disclosed to and consented to by each principal
• ✓Brokers in mortgage loan transactions are agents/fiduciaries, not facilitators

The Predatory Lending Law restricts or prohibits prepayment penalties, balloon payments, negative amortization, advance payments, default interest rates, and single premium life/disability insurance. Home improvement loan proceeds generally must be paid jointly to borrower and contractor. Borrowers must receive a 'Consumer Caution and Home Ownership Counseling Notice' at least three business days before signing.

• ✓The Consumer Caution and Home Ownership Counseling Notice must be delivered at least 3 business days before signing
• ✓Home improvement loan proceeds are generally paid jointly to borrower and contractor
• ✓The law restricts prepayment penalties, balloon payments, negative amortization, and single premium insurance

A Covered Loan may not contain a call/acceleration provision except in three authorized circumstances: borrower default, a due-on-sale provision, or fraud/material misrepresentation. Lenders must have a reasonable belief the borrower can repay from income/resources other than property equity. Persons originating Covered Loans may not steer borrowers to a less favorable risk grade or higher-cost loan than they qualify for.

• ✓Acceleration is only authorized for default, due-on-sale, or fraud/material misrepresentation
• ✓Originators must reasonably believe the borrower can repay from resources other than property equity
• ✓Originators may not steer borrowers to a higher-cost loan than they qualify for
• ✓Stated income loans may not be knowingly originated to evade the Predatory Lending Law

A borrower has three years from the date of occurrence to sue a lender for failure to timely disclose transfer of loan servicing and other servicing issues. The limit is one year from the date of occurrence for a lender's unauthorized payment of referral fees (kickbacks) or forced use of a title insurance company.

• ✓Three-year statute of limitations for loan servicing transfer disclosure violations
• ✓One-year statute of limitations for kickback/referral fee violations or forced use of a title insurance company

Before June 7, 1996, mortgage brokers could charge negotiated fees for limited CLO borrower services (pre-qualifying, counseling, matching products) if federal standards were met and advance notice given. HUD withdrew the CLO notice and the qualified exemption. Now, electronic loan applications are commonplace but broker compensation must be reasonably related to value, and as fiduciaries under California law, commissions must be reasonably earned and actually incurred.

• ✓HUD withdrew the CLO qualified exemption for broker compensation (effective after June 7, 1996)
• ✓Broker compensation must be reasonably related to the value of goods, facilities, and services
• ✓As fiduciaries, commissions/fees must be reasonably earned and actually incurred unless specific authority exists to negotiate

The HUD Secretary cooperates with federal, state, or local agencies with supervisory powers over creditors/lenders and brokers. Failure to comply with RESPA may result in administrative action, debarment, suspension, ineligibility, or action by the HUD Mortgagee Review Board. Remedies are cumulative and do not limit other enforcement.

• ✓Federal agencies with supervisory powers may require RESPA compliance
• ✓RESPA violations may result in debarment, suspension, or HUD Mortgagee Review Board action
• ✓Enforcement remedies are cumulative (24 CFR 3500.19)

Sales/market data comparison compares vacant site sales with the subject, adjusting for time, location, and characteristics. Abstraction obtains land value where there are no vacant land sales by deducting depreciated improvement cost from the sale price. Adjustments are always made to the comparable.

• ✓Adjustments are made for time, location, and characteristics of lots
• ✓Abstraction: sale price minus depreciated improvement value = land value
• ✓Adjustment is always made to the comparable, not the subject
• ✓Do not average adjusted prices; use judgment/reconciliation

Site analysis includes: legal description, taxes (comparison less useful since Proposition 13), zoning and general plan, restrictions and easements, and other interests (life estates, leases). Partial interests divide the bundle of rights, not a mathematical division.

• ✓Legal description helps locate the property within the neighborhood
• ✓Tax comparison is less useful since the adoption of Proposition 13
• ✓Zoning by itself does not create value unless there is demand for the land
• ✓Partial interests divide the bundle of rights among parties

Lot values cluster around a 'site value.' Utility (not just total area) governs value; a 50x150 lot is more valuable than a 25x300 lot even at equal square footage. Corner single-family lots are generally not valued appreciably more than inside lots.

• ✓Lot values cluster around a typical 'site value' for the area
• ✓Utility, not total area, is the governing factor for irregular lots
• ✓Corner single-family lots generally are not valued appreciably more than inside lots
• ✓A good view tends to increase lot value

Certified general appraisers may appraise ANY type of real property. Requirements: at least 300 hours of appraisal education covering AQB core modules plus a Bachelor's Degree (or 30 college semester credits in specified subjects), at least 3,000 hours of experience (of which at least 1,500 must be non-residential) obtained over a minimum of 30 months, and passage of the Uniform State Certified General Real Property Appraiser Examination.

• ✓May appraise any type of real property with no value limit
• ✓Requires 300 education hours and a Bachelor's Degree or 30 semester credits
• ✓Requires 3,000 experience hours (1,500 non-residential) over minimum 30 months

Certified residential appraisers may appraise any one-to-four unit residential property and non-residential property with transaction value up to $250,000. Requirements: at least 200 hours of appraisal education, an Associate Degree (or 21 college semester credits in specified subjects), at least 2,500 hours of experience over a minimum of 30 months, and passage of the Uniform State Certified Residential Real Property Appraiser Examination.

• ✓May appraise any 1-4 unit residential and non-residential up to $250,000
• ✓Requires 200 education hours and an Associate Degree or 21 semester credits
• ✓Requires 2,500 experience hours over minimum 30 months

Residential licensed appraisers may appraise any non-complex one-to-four unit residential property with transaction value up to $1 million, and non-residential property up to $250,000. Requirements: at least 150 hours of appraisal education, at least 2,000 hours of experience over a minimum of 12 months, and passage of the Uniform State Residential Licensed Real Property Appraiser Examination. A CA broker may qualify with 1,000 hours but will be flagged 'Not AQB Compliant' until 2,000 hours are substantiated.

• ✓May appraise non-complex 1-4 unit residential up to $1 million and non-residential up to $250,000
• ✓Requires 150 education hours and 2,000 experience hours over minimum 12 months
• ✓A broker qualifying with 1,000 hours is marked 'Not AQB Compliant' until 2,000 hours substantiated

Trainee licensed appraisers must work under the technical supervision of a state Certified Residential or Certified General appraiser and may assist on any appraisal within the supervising appraiser's authorized scope. No supervising appraiser may supervise more than three trainees at any time. Education is the same as the Residential License; no experience is required; the same examination as the Residential License is required.

• ✓Must work under technical supervision of a Certified Residential or Certified General appraiser
• ✓No supervising appraiser may supervise more than three trainees at any time
• ✓No prior experience required; education same as Residential License

CEQA plays a major role in planning, zoning, and land-use permitting. Its primary purpose is to ensure government agencies consider and respond to environmental effects of proposed decisions. CEQA applies to discretionary projects but not ministerial ones.

• ✓CEQA applies to discretionary projects with potential significant environmental impact (general/specific plan amendments, zoning, CUPs, variances, subdivision maps, development agreements)
• ✓Ministerial projects (final subdivision maps, most building permits) and specifically exempted projects are not subject to CEQA
• ✓The state adopted CEQA Guidelines to implement the process

An initial study is a preliminary investigation prepared by the lead agency to assess potential significant adverse environmental effects and identify the required environmental document. If no significant effect is found, a negative declaration is prepared.

• ✓The initial study identifies the type of environmental document needed
• ✓A negative declaration is prepared when no significant adverse effect will occur
• ✓A mitigated negative declaration is used when project revisions avoid or mitigate potential significant effects

If a project may cause significant effects, the city or county must prepare and certify an EIR before the development decision. The EIR identifies significant impacts, cites mitigation measures, and discusses alternatives; it proceeds through draft and final stages.

• ✓An EIR identifies significant, cumulative, and unavoidable impacts, mitigation measures, and alternatives including 'no project'
• ✓The draft EIR is circulated for public review; the lead agency must prepare written responses to comments
• ✓If significant effects are unavoidable, the project may be approved only if decision-makers adopt a statement of overriding considerations

To reduce workload and speed up routine matters, communities may authorize zoning administrators, boards, or boards of zoning adjustment to handle routine permits and appeals. The Permit Streamlining Act sets time limits for processing applications.

• ✓California's Permit Streamlining Act begins at Government Code Section 65920 and sets time limits for processing applications
• ✓The Subdivision Map Act and CEQA also specify time limits

A broker may engage in other pursuits so long as they do not create a conflict of interest with the broker's fiduciary duty to the client. Upon full disclosure, a broker may broker loans, appraise property on a fee basis, act as an investment adviser/consultant, operate a property insurance business, or offer notary and related services.

• ✓Other pursuits must not conflict with the broker's fiduciary duty to the client
• ✓Related pursuits require full disclosure to the client

A broker may take on the production function by converting raw land into higher-priced land, constructing dwellings or commercial buildings, or developing an entire community, then marketing the products. For this, the broker must have a suitable contractor's license (or work with/for a licensed contractor) and comply with subdivision laws.

• ✓A broker-developer must hold a suitable contractor's license or work with a licensed contractor
• ✓A broker-developer must comply with subdivision laws

A broker often provides notary services as a convenience. A notary must keep a sequential journal of notarial acts and ensure the person whose signature is acknowledged personally appears and provides acceptable identification. Effective January 1, 1996, Government Code Section 8206 requires the notary journal include the right thumb print for signers of a deed, quitclaim deed, or deed of trust affecting real property. Government Code Section 8211 sets maximum fees for notarial functions.

• ✓Government Code Section 8206 requires the right thumb print in the notary journal for deeds, quitclaim deeds, and deeds of trust
• ✓Government Code Section 8211 sets maximum notarial fees; signer must personally appear with acceptable ID

Larger brokerage offices may represent insurance companies in placing policies as a feeder business. A broker acting as an insurance agent acts as the agent of the insurance underwriter, governed by the carrier's instructions, but must eliminate conflicts of interest, comply with fiduciary duties, secure competitive rates, and charge the client no more than the open market. The client must always be able to select their own insurance source.

• ✓As an insurance agent, the broker acts as agent of the underwriter but must still comply with fiduciary duties to the client
• ✓The broker must secure competitive rates and allow the client to choose their own insurance source

Escrow is the deposit of instruments and/or funds with a neutral third party (escrow agent) to carry out an agreement. The escrow agent holds funds in trust and follows instructions. Closing concludes the transaction with document signing/transfer and fund distribution.

• ✓Escrow involves a neutral third party carrying out contract instructions
• ✓An escrow agent holds funds or value in trust for the parties

A trust account is separate and physically segregated from a broker's own funds, where the broker must by law deposit all funds collected for clients. Commingling is the illegal mixing of personal funds with trust funds. Conversion is the unlawful appropriation of another's property (e.g., trust funds).

• ✓A broker must deposit all client funds in a segregated trust account
• ✓Commingling (mixing personal and client trust funds) is illegal
• ✓Conversion is the unlawful appropriation of another's property or trust funds

Closing costs are miscellaneous expenses of transferring ownership above the property price. A closing statement is a separate accounting of funds to buyer and seller, required at completion of every real estate transaction. Accrued expenses are credited to the purchaser; prepaid items are credited to the seller.

• ✓A closing statement provides separate accountings to buyer and seller
• ✓Seller's accrued expenses are credited to the purchaser in a closing statement
• ✓Prepaid items of expense are credited to the seller

Proration adjusts interest, taxes, and insurance on a pro rata basis as of closing. Prepaid items like advance insurance premiums are refunded proportionately to the seller for unused time. Taxes are prorated proportionately between seller and buyer.

• ✓Prorations adjust taxes, interest, and insurance pro rata as of the closing date
• ✓Unused prepaid premiums are refunded proportionately to the seller

The Real Estate Settlement Procedures Act (RESPA) is a federal law requiring disclosure of settlement (closing) procedures and costs to borrowers using HUD-prescribed pamphlets and forms. A Later Date Order commits an owner's title policy covering seller's title as of contract date and brings the exam down to closing.

• ✓RESPA requires disclosure of closing procedures and costs to borrowers
• ✓RESPA disclosures use forms and a pamphlet prescribed by HUD

Escrow is the deposit of instruments and/or funds with a neutral third party under instructions to carry out an agreement or contract. The escrow agent is the neutral third party holding funds or something of value in trust for the parties.

• ✓Escrow requires a neutral third party holding funds/instruments under instructions
• ✓The escrow agent must be neutral and act for all parties per the escrow instructions

Commingling is the illegal mixing of personal funds with money held in trust on behalf of a client. Conversion is the unlawful appropriation of another's property, such as trust funds. Both are prohibited and serious license law violations.

• ✓Commingling (mixing personal and trust funds) is illegal
• ✓Conversion is the unlawful appropriation of another's property, including trust funds

Closing is the process by which parties conclude a sale/mortgage, including signing, transfer of documents and distribution of funds. Closing costs are miscellaneous expenses beyond the property cost. A closing statement is an accounting of funds made separately to buyer and seller. Accrued items of expense (seller's) are credited to the purchaser in the closing statement.

• ✓A closing statement is an accounting of funds made separately to buyer and seller
• ✓Seller's accrued expenses are credited to the purchaser at closing
• ✓Closing includes signing, transfer of documents, and distribution of funds

The Statute of Frauds is a state law requiring certain contracts to be in writing and signed to be enforceable, including contracts for the sale of real property and contracts not performable within one year.

• ✓Requires certain contracts to be in writing and signed
• ✓Applies to real property sale contracts
• ✓Applies to contracts not performable within one year

A quitclaim deed relinquishes any interest without warranty. A warranty deed contains warranties of title. A grant deed (implied warranties) has supplanted warranty deeds in some states due to title insurance.

• ✓Quitclaim deed conveys interest without any warranty of title
• ✓Warranty deed contains warranties of title and quiet possession
• ✓Special warranty deed warrants only against defects during grantor's ownership

An option gives a right, for consideration, to purchase or lease property on specified terms within a specified time without obligation to exercise it. An oral contract is a verbal, unwritten agreement.

• ✓Option requires consideration and specifies terms and time
• ✓Option does not obligate the holder to exercise the right
• ✓Oral contract is not reduced to writing

Novation is substituting a new obligation or contract for an old one by mutual agreement. Rescission cancels a contract and restores parties to their pre-contract positions.

• ✓Novation substitutes a new contract by mutual agreement
• ✓Rescission cancels the contract and restores the parties
• ✓Rescission of contract may be by mutual consent or for cause by either party

Valid means legally sufficient and binding. Void means no force or effect (unenforceable). Voidable is capable of being declared void but valid until action is taken. Null and void means no legal validity.

• ✓Valid = legally sufficient and binding
• ✓Void = no force or effect, unenforceable
• ✓Voidable = valid until action makes it void

Specific performance is an action to compel performance of an agreement (e.g., sale of land) as an alternative to damages or rescission. Time is of the essence makes timely performance essential.

• ✓Specific performance compels contract performance instead of damages
• ✓Time is of the essence requires performance within the specified period

A real property sales contract is an agreement to convey title upon satisfaction of specified conditions which does not require conveyance within one year of contract formation.

• ✓Agreement to convey title upon satisfying conditions
• ✓Does not require conveyance within one year of formation

A reconveyance transfers title from trustee to trustor after the trust deed debt is paid in full. Satisfaction is discharge of a mortgage or trust deed from the records upon payment of the debt.

• ✓Reconveyance transfers legal title from trustee to trustor after full payment
• ✓Satisfaction discharges a mortgage or trust deed from the records

The federal SAFE Act of 2008 requires licensure of mortgage loan originators under national standards through the NMLS&R. California's SB 36 (2009) requires DRE licensees conducting residential MLO activities to obtain a MLO license endorsement. An MLO takes or offers/negotiates terms of a residential mortgage loan for compensation.

• ✓The SAFE Act (2008) established national standards for MLO licensing through the NMLS&R
• ✓California SB 36 requires DRE licensees doing residential MLO activity to obtain an MLO endorsement
• ✓An MLO takes a residential mortgage loan application or offers/negotiates terms for compensation

MLO applicants must complete 20 hours of pre-license education (including 3 hours federal law, 3 hours ethics, 2 hours nontraditional mortgage products). They must pass the SAFE test's National Component and Unique California State Component, each requiring at least 75% correct. New fingerprints must be submitted through the NMLS&R.

• ✓MLO applicants must complete 20 hours of pre-license education from an NMLS-approved provider
• ✓Must pass both National and Unique California State test components with at least 75% correct
• ✓A new set of fingerprints must be submitted through the NMLS&R

MLO applicants must demonstrate financial responsibility and authorize NMLS&R to obtain a credit report via a 'soft pull.' MLO endorsements are issued annually and expire December 31 each year. Renewal requires 8 hours of continuing education, which cannot count toward real estate license CE. Renewal filing runs November 1 through December 31.

• ✓MLO endorsements are issued annually and expire December 31 each year
• ✓Renewal requires 8 hours of NMLS-approved continuing education
• ✓MLO continuing education cannot satisfy real estate license CE requirements

The word 'ethics' comes from the Greek 'ethos' meaning moral custom, use, and character. Ethics is a set of principles or values—a standard of conduct guiding behavior. When a person of expert status directs another's business, health, or investment on a fee basis, a high degree of confidence and trust is vested. Taking advantage of that trust for one's own gain to another's detriment is unethical.

• ✓Ethics derives from the Greek word 'ethos' meaning moral custom and character
• ✓Ethical conduct transcends what is merely sanctioned by law
• ✓Both NAR and Realtists (NAREB) have codified Codes of Ethics that are living documents

Contracts are interpreted to give effect to the mutual intention of parties at contract time, insofar as ascertainable and lawful. Clear language governs. Written execution supersedes prior negotiations. Written parts control printed parts, and original parts control copied form parts; if contradicting, the latter is disregarded. Modification requires mutual assent; a written contract may be altered by a new writing or executed oral agreement.

• ✓Contracts are interpreted to give effect to the parties' mutual intention at contract time
• ✓Written parts control printed parts; original parts control copied form parts
• ✓A written contract may be altered by a new writing or an executed oral agreement

The parol evidence rule prohibits introducing extrinsic (oral or written) evidence to vary or add to the terms of an integrated written instrument. Exceptions allow outside evidence when the contract is incomplete or ambiguous, or to show unenforceability from mistake, fraud, duress, illegality, insufficiency of consideration, or incapacity.

• ✓Parol evidence cannot vary or add to an integrated written contract
• ✓Extrinsic evidence is admissible when the contract is incomplete or ambiguous
• ✓Extrinsic evidence is admissible to show fraud, mistake, duress, or illegality

A contract is assignable unless it requires a personal quality or expressly/impliedly negates the right. An assignment transfers all the assignor's interests; the assignee stands in the assignor's shoes, subject to defenses. The assignor cannot escape obligations by assignment and remains secondarily liable as surety unless the obligee releases them. Assignment of a note carries incidental securities such as mortgages.

• ✓Contracts are assignable unless personal or expressly prohibited
• ✓The assignee stands in the shoes of the assignor, subject to defenses
• ✓The assignor remains secondarily liable unless released by the obligee
• ✓Assignment of a note carries incidental securities like mortgages

Novation is the substitution by agreement of a new obligation for an existing one, with intent to extinguish the old. It may involve a new obligation, a new debtor, or a new creditor. It requires intent to discharge the old contract, consideration, and other valid contract essentials. It may be written or implied from conduct.

• ✓Novation substitutes a new obligation for an old one with intent to extinguish the old
• ✓Novation requires consideration and the essentials of a valid contract
• ✓A creditor taking a promissory note does not discharge the original debt unless expressly agreed

Between full performance and breach, contracts may be discharged by: part performance; substantial performance; impossibility of performance; agreement between parties; release; operation of law; and acceptance of a breach.

• ✓Contracts may be discharged by full performance or breach
• ✓Other methods include impossibility, agreement, release, and operation of law

If no time is specified, a reasonable time is allowed. Acts capable of instant performance must be done immediately upon being ascertained, unless otherwise agreed. If the last day for a legally required act is a holiday, the period extends to the next non-holiday.

• ✓A reasonable time is allowed when no time is specified
• ✓If the last day for performance is a holiday, the period extends to the next non-holiday