California Bans Neg Am Loans

California Governor Arnold Schwarzenegger signed a flurry of bills designed to reign in abuses in the mortgage market today.

The new laws eliminate the use of negative amortization features in “high-priced loans,” which are those charging more three percentage points above a U.S. Treasury bond of the same duration.

Neg am (also known as pay option or pick-a-payment loans) allowed borrowers to skip payments and roll some of their interest costs on to their principal. It was a gimmick popular during the boom because it made a borrower’s monthly payments lower. But it only increased the amount they owed. Note: the ban appears to only apply to “high-priced” loans the definition of which sounds a lot like subprime loans.

The new laws also:

Cap mortgage prepayment penalties at 2% for the first year and 1% after that, also in high-priced loans. Establish standardized licensing requirements for all loan originators.

Make it a felony to commit fraud in connection with a mortgage application.

Require lenders to provide prospective reverse mortgage borrowers with a clear and informative disclosure statement and checklist pertaining to the risks of those loans. Prohibit a seller of residential property from requiring the buyer to use an escrow service company or purchase title insurance chosen by the seller and would also prohibit a seller of residential property from disapproving the use of a title or escrow company chosen by the buyer. Require mortgage loan documents to be translated into the language the verbal negotiations were conducted. Mortgage documents would be translated into Spanish, Chinese, Tagalong, Korean and Vietnamese languages.

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