A California mortgage broker refinances a homeowner's debt-free property into a high-interest loan with a 5-year balloon payment. The broker receives a yield spread premium, and the new loan provides no tangible net benefit to the borrower. Under California Financial Code §4970, how should this transaction be classified?
Correct Answer
D) A predatory lending violation, because refinancing into a high-cost loan with no tangible net benefit to the borrower constitutes loan flipping
California Financial Code §4970 et seq. prohibits predatory lending practices on covered loans, including loan flipping — refinancing an existing loan into a high-cost loan when the transaction provides no tangible net benefit to the borrower. Generating broker compensation through a yield spread premium while placing the borrower in a less favorable financial position is a core element of loan flipping under this statute.
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Related Topics & Key Terms
Key Terms:
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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