A California mortgage broker arranges the refinancing of a homeowner's small remaining mortgage into a high-cost covered loan with a five-year balloon payment. The broker receives a yield spread premium, and the new loan gives the borrower no identifiable benefit: the rate, the monthly payment, and the total cost of credit all go up. Under the covered loan provisions of California Financial Code section 4970 et seq., how should this transaction be classified?
Correct Answer
D) A predatory lending violation, because refinancing a consumer loan into a covered loan that gives the borrower no identifiable benefit is prohibited
California's covered loan law, Financial Code section 4970 et seq., defines a covered loan by size together with a high-rate or high-points-and-fees trigger, and then forbids a list of practices on such loans. Section 4973 bars a person who originates a covered loan from refinancing a consumer loan into a covered loan for refinancing, debt consolidation, or cash out when the new loan produces no identifiable benefit to the borrower, judged against the borrower's stated purpose and the fees, rate, finance charges, and points. That is the defect on these facts: the borrower's rate, payment, and total cost all rise while the broker is paid a yield spread premium for placing the loan.
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Related Topics & Key Terms
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Related Concepts
Predatory lending refers to unfair, deceptive, or abusive lending practices that impose unjustified terms on borrowers, often targeting vulnerable populations. It includes practices like excessive fees, inflated appraisals, and unnecessary refinancing.
RESPA is a federal law that requires lenders to provide borrowers with information about settlement costs, prohibits kickbacks and referral fees, and limits escrow account deposits. It applies to federally related mortgage loans.
The secondary mortgage market is where existing mortgage loans are bought and sold between lenders, investors, and government-sponsored enterprises (GSEs) like Fannie Mae, Freddie Mac, and Ginnie Mae.
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