2844. Lending Practices for Nontraditional and Subprime Mortgage Products.

2844. Lending Practices for Nontraditional and Subprime Mortgage Products.
(a) A real estate broker acting within the meaning of Section 10131.1 of the Code shall adopt and adhere to the policies
and procedures set forth in the guidance on nontraditional mortgage product risks published on November 14, 2006, by
the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, and the
Statement on Subprime Mortgage Lending published on July 17, 2007, by the aforementioned entities and the National
Association of Consumer Credit Administrators, and which are incorporated by reference.

(b) Pursuant to subdivision (a), a real estate broker shall, at a minimum, adopt and adhere to the following:
(1) Risk Management Practices
(A) Consider a borrower's ability to repay the mortgage loan according to its terms as the primary basis for
making the loan rather than the foreclosure or liquidation value of the collateral.
(B) Ensure that a loan results in an identifiable benefit to the borrower and refrain from inducing a borrower to
repeatedly refinance a loan in order to charge high points and fees each time the loan is refinanced.
(C) Fully disclose the true nature of the mortgage loan obligation, or ancillary products to the borrower.
(2) Underwriting Standards

(A) Analyze a borrower's repayment capacity to include an evaluation of his/her ability to repay the loan by
final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule. For products that
permit negative amortization, a repayment analysis should be based on the initial loan amount plus any balance
increase that may accrue from the negative amortization.

(B) Avoid combining nontraditional loan features such as interest-only or negative amortization loans with
reduced documentation or simultaneous second-lien loans (piggyback) unless there are mitigating factors such
as high credit scores, low loan to value ratios (LTVs) and debt to income ratios (DTI), significant liquid assets,
mortgage insurance or other credit enhancements.



(C) Accept stated income or reduced documentation only if there are mitigating factors that clearly minimize
the need for direct verification of the borrower's repayment. The mitigating factors shall be documented.
(D) When setting introductory rates on adjustable rate mortgages, consider the spread between the introductory
rate and the fully indexed rate to minimize negative amortization, "payment shock" and earlier-than-scheduled
recasting of monthly payments. Pursuant to the Statement on Subprime Mortgage Landing ". . . [p]ayment shock
refers to a significant increase in the amount of the monthly payment that generally occurs as the interest rate
adjusts to a fully indexed basis. Products with a wide spread between the initial interest rate and the fully
indexed rate that do not have payment caps or periodic interest rate caps, or that contain very high caps, can
produce significant payment shock".

(E) When making loans to borrowers ensure that such programs do not feature terms that could become
predatory or abusive as described in the "Statement on Subprime Mortgage Lending" under "Predatory Lending
Considerations" and the "Guidance on Nontraditional Mortgage Product Risks" under "Lending to Subprime
Borrowers".

(F) Qualify borrowers financing non-owner occupied investment properties on their ability to service the debt
over the life of the loan and require evidence that the borrower has sufficient cash reserves to service the loan
considering the possibility of extended periods of property vacancy and the variability of debt service
requirements associated with nontraditional mortgage loan products.
(G) Qualify a borrower's repayment capacity by a debt-to-income (DTI) ratio that includes an assessment of the
borrower's total monthly housing-related payments (e.g. principal, interest, taxes and insurance) and total
monthly obligations as a percentage of gross income.
(3) Control Systems

(A) Design compensation programs that avoid providing incentives for originations inconsistent with sound
underwriting and consumer protection principles. Such programs should not result in the steering of consumers
to products resulting in payment shock or containing prepayment penalties, balloon payments or a higher cost
due to reduced documentation or stated income, to the exclusion of other products for which the consumer may
qualify.
(B) Monitor the quality of third-party originations so that they reflect the broker's lending standards and
compliance with the Real Estate Law, Regulations of the Real Estate Commissioner and other applicable state
and federal laws and regulations.
(4) Consumer Protection
(A) In approving loans, primarily consider the borrower's ability to repay the loan according to its terms.
(B) Assist the consumer in selecting a product by providing information that enables the consumer to understand
material terms, costs, and risks of loan products.
(C) When offering mortgage product descriptions and advertisements, provide clear, detailed information about
the costs, terms, features, and risks of the loan to the borrower including:
 Potential payment shock

 Negative amortization

 Prepayment penalties

 Balloon payments

 Cost of reduced documentation loans

 Responsibility for taxes and insurance

(D) Provide monthly statements to consumers who have Payment Option adjustable rate mortgages (ARMs)
which include information that enables consumers to make informed payment choices, and which include an
explanation of each payment option available and the impact of that choice on loan balances.



(E) Avoid leading borrowers who have Payment Option ARMs to select a non-amortizing or negatively
amortizing payment.