Chapter 4Financial Condition, Transaction and Bond Requirements

Section § 50200

Explanation

This law requires licensed residential mortgage lenders or servicers to have their books and accounts audited annually by an independent certified public accountant. The audit should be thorough enough for the accountant to express an opinion on the financial statements, and include a reconciliation of trust accounts. If a financial statement comes with qualifications, the licensee may need to take corrective action as directed by the commissioner.

The audit report must be filed with the commissioner within 105 days after the fiscal year's end, and late submissions may be regulated. If a licensee neglects to have the audit done, the commissioner can arrange it at the licensee's cost and revoke the license for failing to comply. However, audits following HUD's uniform single audit standards are acceptable for this requirement.

(a)CA Financial Code § 50200(a) At the end of the licensee’s fiscal year, but in no case more than 12 months after the last audit conducted pursuant to this section, each licensed residential mortgage lender or servicer shall cause its books and accounts to be audited by an independent certified public accountant. Beginning with all audits of business conducted after December 31, 1995, the audit shall be sufficiently comprehensive in scope to permit the expression of an opinion on the financial statements prepared in accordance with generally accepted accounting principles and shall be performed in accordance with generally accepted auditing standards. The audit shall include a reconciliation of the licensee’s trust accounts as of the audit date.
(b)CA Financial Code § 50200(b) “Expression of an opinion” includes (1) an unqualified opinion, (2) a qualified opinion, (3) a disclaimer of opinion, or (4) an adverse opinion. If a financial statement, report, certificate, or opinion of the independent certified public accountant is in any way qualified, the commissioner may require the licensee to take any action that the commissioner deems appropriate to address the qualification. The commissioner may reject any financial statement, report, certificate, or opinion by notifying the licensee or other person required to make the filing of the rejection and the reason therefor. Within 30 days after the receipt of the notice, the licensee or other person shall correct the deficiencies. Failure to correct the deficiencies is a violation of this division. The commissioner shall retain a copy of all financial statements, reports, certificates, or opinions so rejected.
(c)CA Financial Code § 50200(c) If a qualified or adverse opinion is expressed or if an opinion is disclaimed, the reasons therefor must be fully explained.
(d)CA Financial Code § 50200(d) The audit report shall be filed with the commissioner within 105 days of the end of the licensee’s fiscal year. The report filed with the commissioner shall be certified by the certified public accountant conducting the audit. The commissioner may promulgate rules regarding late audit reports.
(e)CA Financial Code § 50200(e) If a licensee required to make an audit fails to cause an audit to be made, the commissioner may cause the audit to be made by an independent certified public accountant at the licensee’s expense. The commissioner shall select the independent certified public accountant by advertising for bids or by other fair and impartial means that the commissioner establishes by rule. The commissioner may summarily revoke the license of a licensee who fails to file a certified financial statement prepared by an independent certified public accountant as required by this division or at the request of the commissioner. If, after a revocation order is made, the request for hearing is filed in writing within 30 days from the date of service of the order and a hearing is not held within 90 days of the filing, the order is deemed rescinded as of its effective date. During a period when its license is revoked, a licensee shall not conduct business pursuant to this division except as may be permitted by further order of the commissioner. However, the revocation, suspension, or surrender of a license shall not affect the powers of the commissioner as provided in this division.
(f)CA Financial Code § 50200(f) Audits conducted in accordance with the uniform single audit procedures of the United States Department of Housing and Urban Development may be submitted in fulfillment of the requirements of this section.
residential mortgage lender licensed servicer fiscal year audit independent certified public accountant financial statement opinion trust account reconciliation qualified opinion audit report deadline commissioner's authority audit compliance license revocation HUD uniform single audit corrective action audit cost responsibility audit standards
(Amended by Stats. 2018, Ch. 356, Sec. 2. (SB 1201) Effective January 1, 2019.)

Section § 50201

Explanation

If you're a company that makes or services home loans in California, you need to keep a minimum net worth of $250,000 at all times. This rule applies even if you employ mortgage loan originators. The financial commissioner can ask certain lenders to maintain a higher net worth, but it won't be more than what the Federal Housing Administration requires. The net worth must be calculated using standard accounting rules.

The commissioner also has the power to set specific rules about these net worth requirements to align with federal guidelines known as the SAFE Act.

(a)CA Financial Code § 50201(a) A licensee issued a license for purposes of making or servicing residential mortgage loans, including a licensee employing one or more mortgage loan originators, shall continuously maintain a minimum tangible net worth at all times of two hundred fifty thousand dollars ($250,000). The commissioner, in his or her discretion, may require a lender who engages in the activities described in paragraph (2) of subdivision (m) of Section 50003 to continuously maintain a minimum tangible net worth of an amount that is greater than two hundred fifty thousand dollars ($250,000), but that does not exceed the net worth required of an approved lender under the Federal Housing Administration.
(b)CA Financial Code § 50201(b) Tangible net worth shall be computed in accordance with generally accepted accounting principles.
(c)CA Financial Code § 50201(c) The commissioner may promulgate rules or regulations with respect to the requirements for minimum net worth, as are necessary to accomplish the purposes of this division and comply with the SAFE Act.
minimum tangible net worth residential mortgage loans mortgage loan originators financial commissioner Federal Housing Administration net worth calculation generally accepted accounting principles SAFE Act compliance residential lenders mortgage servicing net worth requirements California mortgage regulations FHA net worth accounting standards financial compliance
(Amended by Stats. 2016, Ch. 797, Sec. 2. (SB 657) Effective January 1, 2017.)

Section § 50202

Explanation

This law outlines how escrow funds related to residential mortgage loans should be handled. These funds must comply with federal and state laws, be maintained in a specific type of bank account, and kept separate from the licensee's own money. The funds can only be used for specific purposes like payments required by the loan, refunds, or transfers to other institutions. "Trust funds" refer to money a licensee holds for someone else while managing a mortgage loan.

Any benefits from placing these funds in a non-interest-bearing account go to the lender unless otherwise agreed. Borrowers are entitled to interest on certain account payments. Trust funds can't be claimed in lawsuits against the lender, and are separate from the lender's assets. Licensees can transfer funds to interest-bearing accounts if requested, but there are strict rules about how these accounts are handled, including disclosure about how interest is managed.

(a)CA Financial Code § 50202(a) Escrow funds for a purpose authorized by the residential mortgage loan contract (1) shall be subject to and satisfy all applicable state and federal requirements, including Section 2609 of the federal Real Estate Settlement Procedures Act of 1974, as amended (12 U.S.C. Sec. 2601 et seq.) and all applicable provisions of the Civil Code, (2) shall be maintained in a depository institution as described in subdivision (b), and (3) may not be commingled with a licensee’s funds.
(b)CA Financial Code § 50202(b) Except as provided in subdivision (f), or as authorized by Section 2954.85 of the Civil Code, a trust account shall be placed in a non-interest-bearing account in a federally insured depository institution, a federal home loan bank, a federal reserve bank, or other similar government-sponsored enterprise, to be removed and used only for the following:
(1)CA Financial Code § 50202(b)(1) Payments authorized by the borrower, allowed by the mortgage loan contract, or required by federal or state law.
(2)CA Financial Code § 50202(b)(2) Refunds to the borrower.
(3)CA Financial Code § 50202(b)(3) Transfer to another institution that is described in this subdivision.
(4)CA Financial Code § 50202(b)(4) Forwarding to the appropriate servicer in case of a transfer of servicing.
(5)CA Financial Code § 50202(b)(5) Any other purpose authorized by the residential mortgage loan contract.
(6)CA Financial Code § 50202(b)(6) Compliance with a regulatory or court order.
(c)CA Financial Code § 50202(c) As used in this section, “trust funds” means funds collected by a licensee in connection with the making or servicing of a residential mortgage loan that the licensee holds on behalf of another.
(d)CA Financial Code § 50202(d) Notwithstanding any other provision of law, but subject to the limitations of Section 854, benefits accruing from the placement in a non-interest-bearing account of a commercial bank (including a national banking association) of funds received by a licensee who services mortgage loans under this law, shall inure to the licensee, unless otherwise agreed in writing by the licensee and the investor on whose behalf the licensee services the loan. A borrower shall receive at least 2 percent simple interest per annum on impound account payments covered by Section 2954.8 of the Civil Code.
(e)CA Financial Code § 50202(e) Trust funds are not subject to the enforcement of a money judgment arising out of a claim against the licensee or person acting as the servicing agent, and in no instance shall the trust funds be considered or treated as an asset of the licensee or person performing the functions of a residential mortgage lender or loan servicer.
(f)CA Financial Code § 50202(f) A licensee may, at the request of the owner of the trust funds, transfer the funds initially deposited in a non-interest-bearing trust account into an interest-bearing account in a federally insured depository institution if all of the following requirements are met:
(1)CA Financial Code § 50202(f)(1) The account is in the name of the residential mortgage lender licensee in trust for the specified beneficiary.
(2)CA Financial Code § 50202(f)(2) All of the funds in the account are federally insured.
(3)CA Financial Code § 50202(f)(3) The funds in the account are kept separate and distinct from the funds of the licensee or funds of any other person for whom the licensee holds funds in trust.
(4)CA Financial Code § 50202(f)(4) The licensee discloses to the person from whom the funds are received and the beneficiary of the account how interest will be calculated and paid, whether service charges will be paid to the depository and by whom, and possible notice requirements or penalties for withdrawal of funds from the account.
(5)CA Financial Code § 50202(f)(5) All interest earned on the account will be paid to the owner of the trust funds or the beneficiary.
escrow funds residential mortgage loans trust account federally insured depository institution non-interest-bearing account trust funds commercial bank benefits borrower interest asset separation money judgment exemption interest-bearing account interest disclosure funds transfer rules licensee obligations trust fund management
(Amended by Stats. 2025, Ch. 103, Sec. 2. (AB 493) Effective August 29, 2025.)

Section § 50203

Explanation

This California financial law states that mortgage lenders can't charge borrowers extra fees before closing a loan, except under specific conditions. Borrowers can be charged for necessary third-party services like appraisals and credit reports, as well as an application fee. They can also pay a rate-lock fee if there's a written agreement detailing terms like the loan amount, interest rate, and whether the fee is refundable. Additionally, a commitment fee can be charged after the loan's approval, provided there is a written commitment detailing terms and conditions.

If the loan doesn't close and the lender has followed the rules, fees (except those for third-party services and application fees) must be refunded unless specific borrower faults occur, like withdrawing the application or making a false statement.

(a)CA Financial Code § 50203(a) A licensee may not require a borrower to pay fees or charges prior to the residential mortgage loan closing, except for:
(1)CA Financial Code § 50203(a)(1) Actual charges to be incurred by the licensee on behalf of the borrower for services from third parties necessary to process the application, such as credit reports, appraisals, flood certification, and tax service, and in transactions where these services are provided by the licensee, a charge not to exceed the prevailing market rate for the service.
(2)CA Financial Code § 50203(a)(2) An application fee.
(3)CA Financial Code § 50203(a)(3) A rate-lock fee, provided:
(A)CA Financial Code § 50203(a)(3)(A) There is a written agreement signed by the borrower and licensee.
(B)CA Financial Code § 50203(a)(3)(B) The terms of the agreement include, but are not limited to:
(i)CA Financial Code § 50203(a)(3)(B)(i) The expiration date of the rate-lock fee agreement.
(ii)CA Financial Code § 50203(a)(3)(B)(ii) The principal amount of the mortgage loan, the term of the mortgage loan, and identification of the property.
(iii)CA Financial Code § 50203(a)(3)(B)(iii) The initial interest rate and the discount (points) to be paid.
(iv)CA Financial Code § 50203(a)(3)(B)(iv) The amount and payment term of the rate-lock fee along with a statement disclosing whether the fee is refundable and the terms and conditions necessary to obtain a refund.
(C)CA Financial Code § 50203(a)(3)(C) The licensee demonstrates to the commissioner that it is able to perform under the terms of the agreement.
(4)CA Financial Code § 50203(a)(4) A commitment fee, upon approval of the residential mortgage loan application, provided:
(A)CA Financial Code § 50203(a)(4)(A) The commitment is in writing and signed by the licensee and the borrower.
(B)CA Financial Code § 50203(a)(4)(B) The commitment contains all of the following information:
(i)CA Financial Code § 50203(a)(4)(B)(i) The terms and conditions of the residential mortgage loan.
(ii)CA Financial Code § 50203(a)(4)(B)(ii) The terms and conditions of the commitment, including, but not limited to, all of the following:
(I)CA Financial Code § 50203(a)(4)(B)(ii)(I) The time period during which the commitment is irrevocable and may be accepted by the borrower, which may not be less than three calendar days from the date of commitment or the date of mailing, whichever is later.
(II) The amount and payment terms of the commitment fee, along with a statement disclosing whether the fee is refundable and the terms and conditions necessary to obtain a refund.
(III) The expiration date of the commitment.
(IV) Conditions precedent to closing.
(b)CA Financial Code § 50203(b) If the licensee has performed its obligations under the law related to the transaction, fees or charges collected pursuant to this section, other than those collected pursuant to paragraphs (1) and (2) of subdivision (a), shall be refunded if a valid commitment or closing, respectively, does not occur, except that the licensee may retain appropriate fees upon the licensee’s demonstration to the commissioner that any of the following occurred:
(1)CA Financial Code § 50203(b)(1) The borrower withdrew the loan application.
(2)CA Financial Code § 50203(b)(2) The borrower made a material misrepresentation or omission on the loan application.
(3)CA Financial Code § 50203(b)(3) The borrower failed, after written request, to provide documentation necessary to the processing or closing of the loan application.
(4)CA Financial Code § 50203(b)(4) The closing failed to occur due solely to the fault of the borrower.
residential mortgage loan closing borrower fees third-party services credit reports appraisals rate-lock fee written agreement commitment fee loan application withdrawal material misrepresentation failure to provide documentation fault of borrower refundable fees conditions precedent to closing expiring commitment
(Amended by Stats. 1995, Ch. 564, Sec. 14. Effective January 1, 1996.)

Section § 50204

Explanation

This law outlines what mortgage lenders in California are not allowed to do. It prohibits lenders from disbursing loan funds in unauthorized ways and requires them to follow through on loan commitments. Lenders must disclose all fees at closing, avoid acts that violate existing civil and business codes, and cannot leave blanks in agreements that are filled in later. They're also forbidden from intentionally delaying loan closings to increase costs, engaging in fraudulent underwriting, or paying appraisers to sway their judgments. Lenders cannot misrepresent mortgage deals, commit fraud, or sell a large number of loans to non-institutional buyers. Additionally, all loans must comply with licensing and civil codes, and only licensed mortgage originators can broker loans unless exempt.

A licensee may not do any of the following:
(a)CA Financial Code § 50204(a) Disburse the mortgage loan proceeds in a form other than direct deposit to the borrower’s or borrower’s designee’s account, wire, bank or certified check, ACH funds transfer, or attorney’s check drawn on a trust account. An entity may apply to the commissioner for a waiver of the requirements of this subdivision by demonstrating, in a letter application, that it has adopted or will adopt another method of disbursement of loan proceeds that will satisfy the purposes of this subdivision.
(b)CA Financial Code § 50204(b) Fail to disburse funds in accordance with a commitment to make a mortgage loan that is accepted by the applicant.
(c)CA Financial Code § 50204(c) Accept fees at closing that are not disclosed to the borrower on the federal HUD-1 Settlement Statement.
(d)CA Financial Code § 50204(d) Commit an act in violation of Section 2941 of the Civil Code.
(e)CA Financial Code § 50204(e) Obtain or induce an agreement or other instrument in which blanks are left to be filled in after execution.
(f)CA Financial Code § 50204(f) Intentionally delay closing of a mortgage loan for the sole purpose of increasing interest, costs, fees, or charges payable by the borrower.
(g)CA Financial Code § 50204(g) Engage in fraudulent home mortgage underwriting practices.
(h)CA Financial Code § 50204(h) Make payment of any kind, whether directly or indirectly, to an in-house or fee appraiser of a government or private money lending agency, with which an application for a home mortgage has been filed, for the purpose of influencing the independent judgment of the appraiser with respect to the value of real estate that is to be covered by the home mortgage.
(i)CA Financial Code § 50204(i) Engage in any acts in violation of Section 17200 or 17500 of the Business and Professions Code.
(j)CA Financial Code § 50204(j) Knowingly misrepresent, circumvent, or conceal, through subterfuge or device, any material aspect or information regarding a transaction to which it is a party.
(k)CA Financial Code § 50204(k) Do an act, whether of the same or a different character than specified in this section, that constitutes fraud or dishonest dealings.
(l)CA Financial Code § 50204(l) Sell more than eight loans in a calendar year made under the authority of this license to a person who is not an institutional investor.
(m)CA Financial Code § 50204(m) Commit an act in violation of Section 1695.13 of the Civil Code.
(n)CA Financial Code § 50204(n) Make or service a loan that is not a residential mortgage loan under the authority of the license.
(o)CA Financial Code § 50204(o) Commit an act in violation of Section 2948.5 of the Civil Code. Evidence of compliance with Section 2948.5 of the Civil Code may be evidenced by (1) a certification executed by the licensee, at no cost to the borrower, pursuant to Section 2015.5 of the Code of Civil Procedure, or (2) other evidence in the loan file acceptable to the commissioner.
(p)CA Financial Code § 50204(p) Make or broker a loan that is offered by, negotiated by, or applied for through a mortgage loan originator who is not licensed in this state through the Nationwide Mortgage Licensing System and Registry, unless the mortgage loan originator is exempt from licensure.
mortgage loan proceeds disbursement loan commitment undisclosed fees fraudulent underwriting appraiser influence misrepresentation blanks in agreements intentional closing delays non-institutional loan sales residential mortgage loan licensed mortgage originator Nationwide Mortgage Licensing System waiver of requirements Civil Code compliance Business and Professions Code violations
(Amended by Stats. 2009, Ch. 160, Sec. 65. (SB 36) Effective October 11, 2009.)

Section § 50205

Explanation

This law requires residential mortgage lenders or servicers in California to maintain a surety bond of $50,000, which can be increased to $100,000 if they fail to comply with regulations. This bond helps cover expenses, fines, and losses due to noncompliance. If a bond is acted upon, a new bond must be filed within 10 days, or the license may be suspended or revoked. Additionally, the bond amount can be increased based on the amount of loans originated by the licensee and their mortgage loan originators, providing coverage for all employed originators.

(a)CA Financial Code § 50205(a) A residential mortgage lender or servicer licensee shall maintain a surety bond in accordance with this subdivision. The bond shall be used for the recovery of expenses, fines, and fees levied by the commissioner in accordance with this division or for losses or damages incurred by borrowers or consumers as the result of a licensee’s noncompliance with the requirements of this division. The bond shall be payable when the licensee fails to comply with a provision of this division and shall be in the amount of fifty thousand dollars ($50,000), and may be increased by order of the commissioner to one hundred thousand dollars ($100,000) upon a determination by the commissioner that the licensee is not in compliance with any provision of this chapter or any rule or order adopted or issued by the commissioner to implement or enforce provisions of this chapter. The bond shall be payable to the commissioner and issued by an insurance company authorized to do business in this state. An original surety bond, including any and all riders and endorsements executed subsequent to the effective date of the bond, shall be filed with the commissioner within 10 days of its execution.
(b)CA Financial Code § 50205(b) When an action is commenced on a licensee’s bond, the commissioner may require the filing of a new bond. Immediately upon the recovery of an action on the bond, the licensee shall file a new bond. Failure to file a new bond within 10 days of the recovery on a bond, or within 10 days after notification by the commissioner that a new bond is required, constitutes sufficient grounds for the suspension or revocation of the license.
(c)CA Financial Code § 50205(c) The commissioner may by rule require a higher bond amount for a licensee employing one or more mortgage loan originators, based on the dollar amount of residential mortgage loans originated by that licensee and any mortgage loan originators employed by that licensee. Every mortgage loan originator employed by the licensee shall be covered by the surety bond.
residential mortgage lender servicer licensee surety bond recovery expenses fines borrower losses consumer damages noncompliance insurance company bond filing license suspension license revocation mortgage loan originator higher bond amount residential mortgage loans
(Amended by Stats. 2009, Ch. 160, Sec. 66. (SB 36) Effective October 11, 2009.)

Section § 50206

Explanation

If someone wants to take control of a business that holds a license, they must apply to the state commissioner beforehand and pay a $100 fee. This application should include specific information needed to prove they meet certain requirements. The commissioner will then decide whether to approve or reject this change of control based on existing rules. If the commissioner disapproves, the person must stop any regulated activities immediately.

(a)CA Financial Code § 50206(a) Prior to a change of control of the business of a licensee, the person wishing to acquire control shall submit an application to the commissioner and pay an investigation fee of one hundred dollars ($100). The application shall contain the information that the commissioner, by rule, may prescribe as necessary to determine that the person meets the requirements of Section 50121.
(b)CA Financial Code § 50206(b) The commissioner shall approve or disapprove the proposed change of control of a licensee in accordance with the provisions of Section 50126.
(c)CA Financial Code § 50206(c) Upon notification by the commissioner that the change of control has been disapproved, the acquiring party shall immediately cease any activity subject to regulation under this division.
change of control business license acquiring control commissioner approval investigation fee licensee requirements Section 50121 Section 50126 business acquisition regulated activities control disapproval application process business regulation regulation compliance fee payment
(Amended by Stats. 2009, Ch. 160, Sec. 67. (SB 36) Effective October 11, 2009.)

Section § 50207

Explanation

If you have a business license, it must be clearly displayed at your business location, along with any approval for using a different business name. This is required under certain sections that allow for name changes.

Your license cannot be transferred to someone else. If your business is a partnership, the license remains valid even if partners leave or join, unless those changes cause the partnership to dissolve.

(a)CA Financial Code § 50207(a) A license, along with any currently effective order of the commissioner approving use of a different name pursuant to Sections 50120 and 50130, shall be conspicuously posted in the place of business authorized by the license.
(b)CA Financial Code § 50207(b) A license is not transferable or assignable. A license issued to a partnership or a limited partnership is not transferred or assigned within the meaning of this section by the death, withdrawal, or admission of a partner, general partner, or limited partner, unless the death, withdrawal, or admission dissolves the partnership to which the license was issued.
business license display name approval order partnership changes license non-transferable business location requirement partnership dissolution license issues death of partner withdrawal of partner admission of partner license assignability different business name license validity
(Added by Stats. 1994, Ch. 994, Sec. 7. Effective January 1, 1995. Operative January 1, 1996.)

Section § 50208

Explanation

This section explains what must be included on a license for different types of mortgage-related businesses. If the business is a partnership, the license should list the names of its general partners. For corporations or associations, it must include the date and place of their formation. If it's a residential mortgage lender or servicer, it should provide the main business address. Also, the license should specify if the business is a mortgage loan lender, servicer, or originator.

The license shall state the name of the licensee. If the licensee is a partnership, the license shall state the names of its general partners. If the licensee is a corporation or an association, the license shall state the date and place of the corporation’s incorporation or organization. If the licensee is a residential mortgage lender or servicer, the license shall state the address of the licensee’s principal business location. The license shall state whether the licensee is licensed as a residential mortgage loan lender or servicer or as a mortgage loan originator.
license content mortgage business general partners corporation incorporation association organization principal business location residential mortgage lender mortgage servicer mortgage loan originator licensee identification business type specification partnership names listing corporate details organization date and place main address disclosure
(Amended by Stats. 2009, Ch. 160, Sec. 68. (SB 36) Effective October 11, 2009.)

Section § 50209

Explanation

If you're a licensed mortgage loan originator in California, you must make sure your unique identifier is clearly displayed on all your residential mortgage loan paperwork and promotional materials. This includes application forms, ads, business cards, websites, and any other documents required by the commissioner.

The unique identifier of any licensed mortgage loan originator shall be clearly shown on all residential mortgage loan application forms, solicitations, or advertisements, including business cards or Internet Web sites, and any other documents as established by rule, regulation, or order of the commissioner.
licensed mortgage loan originator unique identifier residential mortgage loan application solicitations advertisements business cards Internet websites commissioner mortgage paperwork promotional materials California mortgage regulations
(Added by Stats. 2009, Ch. 160, Sec. 69. (SB 36) Effective October 11, 2009.)