Negative amortization on a California covered loan is:
Correct Answer
A) Allowed for a first mortgage if the required negative-amortization disclosure is provided
A California covered loan generally may not contain negative amortization, but section 4973 contains an exception for a first mortgage when the originator discloses that the loan contains a negative-amortization provision that may add principal to the loan balance.
Why This Is the Correct Answer
Allowed for a first mortgage if the required negative-amortization disclosure is provided is correct. A California covered loan generally may not contain negative amortization, but section 4973 contains an exception for a first mortgage when the originator discloses that the loan contains a negative-amortization provision that may add principal to the loan balance. A California covered loan generally may not contain negative amortization, but section 4973 contains an exception for a first mortgage when the originator discloses that the loan contains a negative-amortization provision that may add principal to the loan balance.
Why the Other Options Are Wrong
Option B: Allowed for the first 5 years only
California’s covered-loan negative-amortization rule is not a simple five-year allowance.
Option C: Prohibited in all circumstances
The statute is not an absolute ban in all circumstances because it includes a first-mortgage disclosure exception.
Option D: Allowed if the loan has a fixed rate
A fixed rate alone does not make negative amortization permissible.
Memory Technique
CA -> ca-covered-loans-high-cost-consumer-protections
Exam Tip
Covered-loan questions often test the 8-point APR trigger, 6 percent points-and-fees trigger, principal-dwelling scope, Consumer Caution notice timing, ATR, prepayment penalty limits, prohibited loan terms, and remedies.
Common Mistakes to Avoid
- -Using a national baseline answer when California has agency-specific DFPI or DRE requirements
- -Confusing CFL, CRMLA, covered-loan, usury, servicing, and DRE endorsement rules
- -Relying on legacy California state-exam or education assumptions instead of current NMLS source pages
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