The latest edition of the Consumer Finance State Roundup highlights recently enacted measures of potential interest from two states:
California:
Effective January 1, California Assembly Bill 3108 addresses mortgage fraud. Previously, California law defined “mortgage fraud” to include, in connection with a mortgage loan transaction, filing with the county recorder any document that the person knows to contain a deliberate misstatement, misrepresentation, or omission, and with the intent to defraud.
Taking this a step further, the measure prohibits the filing of any document with the recorder of any county that a person knows to contain a material misstatement, misrepresentation, or omission. Further, the measure expressly provides that a mortgage broker or person who originates a loan commits mortgage fraud if, with the intent to defraud, the person takes specified actions relating to instructing or deliberately causing a borrower to sign documents reflecting certain loan terms with knowledge that the borrower intends to use the loan proceeds for other uses. For prosecution purposes, the alleged fraud value must be $950 or more (the threshold for grand theft).
A mortgage lender could unintentionally find itself guilty of mortgage fraud if it simply allows a borrower to use a business purpose loan for consumer purposes or makes a bridge loan that it knows will not be used for a dwelling. California’s Penal Code § 532f(b) makes it mortgage fraud for a mortgage broker or lender to allow mortgage-related documents to be formed and filed when the broker or lender has reason to know that the borrower intends on using the loan for purposes other than for what the loan is intended.
Although intent to defraud is an element to this crime, that element can only be determined through rigorous and time-consuming investigation. If a borrower, for example, uses a business loan for consumer purposes or does not apply the funds from a bridge loan towards a dwelling, the lender will be subject to additional scrutiny unless it can prove that all efforts were made to understand the borrower’s plans for the funds.
The measure also prohibits a person who originates a covered loan from avoiding, or attempting to avoid, the application of the law regulating the provision of covered loans by committing mortgage fraud. A “covered loan” means a consumer loan in which the original principal balance of the loan does not exceed the most current Fannie Mae conforming loan limit for a single-family first mortgage loan.
The measure also amends Section 4973 of the Financial Code, which imposes certain requirements ad restrictions (e.g., the inclusion of a prepayment fee or penalty after the first 36 months) in connection with covered loans and amends Section 532f of the Penal Code (as discussed above) in connection with the prohibition on committing mortgage fraud.
New York:
- Effective June 11, Assembly Bill 424 amends Section 35 of the Banking Law, which relates to an information pamphlet that residential mortgage lenders must provide to applicants. In place of making a physical pamphlet available to lenders, the amended section requires the Department of Financial Services to notify mortgage bankers of the posting a digital version of the pamphlet on the Department’s website (and when it makes any changes thereto). The measure also amends the pamphlet contents to reflect that a lender may provide an applicant with a good faith estimate (instead of a loan estimate), depending on the type of loan for which the applicant is applying.
- Effective May 15, Assembly Bill 2056 amends Section 283 of the Real Property Law, which limits the amount of flood insurance that a mortgagee may require a mortgagor to maintain. Under current law, that section provides that the maximum amount of coverage a mortgagee may require is the mortgage’s outstanding principal amount as of January 1 of the year the policy will be in effect. As amended, that section makes the maximum permitted amount of coverage the lesser of the outstanding principal amount or the residential property’s replacement. Additionally, AB2056 slightly alters the printed notice about flood insurance that a mortgagee must deliver to mortgagors, removing language referring to the fact that required coverage would only protect the interest of the lender or creditor in the property.
- Effective March 21, New York Senate Bill 804 amends data breach notification requirements. Section 899-aa of the General Business Law requires a person or business to notify New York residents whose data is part of a breach, as well as to provide notice to certain governmental entities (including the Department of Financial Services). As amended, that section will require notification to the Department of Financial Services (in the form mandated by N.Y. Comp. Code R. & Regs. tit. 23, § 500.17) only by “covered entities.” A “covered entity” is any person who requires any type of authorization to operate under the Banking Law, Insurance Law, or Financial Services Law, and thus includes a mortgage banker or mortgage servicer.