A covered loan secured by a 2nd lien has a payment schedule under which the principal balance rises for the first 24 months. Is this negative-amortization schedule permitted on a covered second-lien loan?
Correct Answer
A) Prohibited: negative amortization is allowed only on a first mortgage
A covered loan may not provide for negative amortization unless it is a first mortgage with the required disclosure, so a second lien cannot carry it. Other choices: initialing a schedule does not lift a prohibition; a rising balance is a term of the loan rather than a pricing choice; and no percentage threshold appears in the provision. Source: Cal. Fin. Code § 4973(d)
Why This Is the Correct Answer
A covered loan may not provide for negative amortization unless it is a first mortgage with the required disclosure, so a second lien cannot carry it. Other choices: initialing a schedule does not lift a prohibition; a rising balance is a term of the loan rather than a pricing choice; and no percentage threshold appears in the provision. Source: Cal. Fin. Code § 4973(d)
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