Assembly Bill 3108: California Ups the Ante on Owner-Occupied Business Loans
Apparently, the California Legislature believes that too many mortgage brokers have contorted consumer owner-occupied loans into business purpose loans. On top of that they must also believe the consumer bridge loan exception is being misused in ways it was never intended. Why? Because by Assembly Bill 3108 the Legislature has now made it felony mortgage fraud for a “mortgage broker or person who originates a loan” to intentionally:
(1)
Instruct[s] or otherwise deliberately cause[s] a borrower to sign documents reflecting the terms of a business, commercial, or agricultural loan, with knowledge that the borrower intends to use the loan proceeds primarily for personal, family, or household use.
(2)
Instruct[s] or otherwise deliberately causes a borrower to sign documents reflecting the terms of a bridge loan, with knowledge that the loan proceeds will be not used to acquire or construct a new dwelling. For purposes of this subdivision, a bridge loan is any temporary loan, having a maturity of one year or less, for the purpose of acquisition or construction of a dwelling intended to become the consumer’s principal dwelling.
A Felony Conviction Will Cost You More Than Just Money—It Can End Your Career
No longer is just money at stake in owner-occupied business purpose loans and bridge loans—your freedom is now on the line. Don’t forget, if you are convicted of a felony, you will be stripped of all mortgage licensing and you will not be able to get it back for years and years.
What can you do?
Protecting Business Purpose Owner-Occupied Loans
First, going forward, follow our time-tested “recipe” for business purpose owner-occupied loans:
- Obtain a handwritten letter detailing the business purpose
- Gather corroborating evidence of the business purpose (e.g., business registration, financial statements, invoices)
- Use a formal business purpose certificate
- Fund to a business bank account, when title and escrow allow
To protect the loan even further, add:
- A Doss Law ZoomLockTM video recording of a business purpose conversation on EVERY business purpose owner-occupied loan. If you prefer to do it yourself, we have a sample script on our website. To ensure accuracy and avoid risk, hire Doss Law, LLP, to handle your ZoomLock call.
- Legal opinion from the borrower’s legal counsel or your own. Advice of counsel is a defense to a crime if the accused shows that he or she:
1) made a complete and honest disclosure to his or her counsel concerning the matter at issue; 2) sought advice regarding the legality of his or her conduct; 3) received advice that the conduct was legal; and 4) relied on that advice in good faith.
More than likely, the cost of these protective measures will be passed onto borrowers, increasing the cost.
Warning: Waiving Your Attorney-Client Privilege
Keep in mind that if you are criminally charged and assert the advice of counsel defense, you may be forced to waive your attorney-client privilege about the loan. Be mindful of communications with the attorney advising you since you may have to disclose those communications.
AB 3108 Tightens Bridge Loan Rules
Some mortgage companies have experimented with so-called “bridge-to-sale” or “bridge-to-conventional” type loans.
- Bridge-to-sale loans are short-termed loans to rehabilitate properties about to be put on the market.
- Bridge-to-conventional loans are loans to clean-up borrowers’ credit profiles in anticipation of conventional, lower-cost financing.
AB 3108 Broker and Lender Impact
While there is moral appeal to both, the recent enactment of AB 3108 in California significantly impacts mortgage brokers and lenders, concerning bridge loans. AB 3108 has now made it clear that:
- The only permissible bridge loan is one that enables a borrower to buy or build a new home.
An additional California requirement to Federal law, Regulation Z, defines a bridge loan as:
One where the borrower intends to sell a property after purchasing a new home.
What Are You Left With?
What you are left with are “traditional bridge loans:”
- Loans to enable a borrower to buy a new home before selling an existing property (which need not be their primary).
What Lenders Must Do Now
- Review and update loan products
- Strengthen your documentation processes
- Educate your team
- Monitor compliance
