Investment OperationsReal Estate Loans

Section § 7500

Explanation

This section explains that associations can engage in activities related to real estate loans, such as originating, buying, selling, and servicing these loans, for both residential or commercial properties. Before investing or lending, they must obtain a written appraisal report by qualified appraisers. These appraisers, appointed by the association, must physically inspect the property and provide a detailed appraisal. For purchased loans worth a million dollars or more, an inspection of the property is mandatory. The appraisal report must be signed, include the appraiser’s identification, and follow regulations. If the property is not yet developed, its potential value, assuming improvements are made, is to be considered, provided there are guarantees for such improvements.

(a)CA Financial Code § 7500(a) Subject to limitations, if any, within this chapter, an association may originate, invest in, sell, purchase, service, participate, or otherwise deal in (including brokerage or warehousing) loans, including construction loans, made on the security of residential or nonresidential real property, or interests in these loans.
(b)CA Financial Code § 7500(b) No investment in real property or a real estate loan shall be made by an association until one or more written appraisal reports, prepared at the request of an association or its agent, have been submitted to the association by a person or persons meeting the qualification standards for an appraiser as set forth in the commissioner’s regulations. No commitment to disburse shall be made by the association until the person or persons have been duly appointed and qualified as appraisers by the association. Such a person or persons shall have made a physical inspection and submitted to the association a fully documented appraisal of the real estate that would secure the loan or constitute the investment, or, in the case of a purchased loan, the person or persons have reviewed and approved an appraisal report in support of the loan. If the balance of any purchased loan is one million dollars ($1,000,000) or more, the person or persons reviewing and approving the appraisal report shall have inspected the real estate. Each appraisal report submitted to an association pursuant to this subdivision shall be signed and shall include the tax identification number, social security number, or other form of verifiable identification of the person or persons signing the appraisal report.
(c)CA Financial Code § 7500(c) For the purpose of determining appraised value, unimproved property without offsite improvements shall be evaluated as though offsite improvements have been installed if a subdivision map has been recorded and a bond or other instrument guaranteeing installation of the offsite improvements has been accepted by the governing authorities in connection with the recording of the subdivision map.
real estate loans appraisal report qualified appraisers ...

Section § 7501

Explanation

This law requires that every real estate loan must be documented with a note or a formal obligation that outlines the loan amount and repayment details. It should also include any late payment penalties and any other terms agreed upon in the loan contract.

Each real estate loan shall be evidenced by a note or instrument of obligation for the amount of the loan. The note or instrument shall specify the amount and terms of repayment including any penalty or charge for late payment, and may contain all other terms of the loan contract.
real estate loan note instrument of obligation ...

Section § 7502

Explanation

When you take out a real estate loan, it must be backed by a legal claim on the property, like a deed of trust or mortgage. This means there's a formal agreement that ties the loan directly to the property. The law refers to all these legal claims as 'mortgages.'

The mortgage agreement should clearly outline protection measures for the association providing the loan, covering the loan's main amount and any extra funds that might be loaned later. This includes any specific terms that the loan provider thinks are necessary for the agreement.

(a)CA Financial Code § 7502(a) Each real estate loan shall be secured by a deed of trust, mortgage, or other transaction or instrument constituting a lien or claim, or its equivalent, upon the real estate securing the loan, according to any lawful and recognized practice that is suited to the transaction. Any deed of trust or other instrument or transaction constituting a lien or claim is included in the term “mortgage” in this division.
(b)CA Financial Code § 7502(b) A mortgage shall provide specifically for full protection to the association with respect to the loan and additional advances, including any terms and conditions that the association deems necessary and appropriate to state the agreement between the parties.
real estate loan deed of trust lien ...

Section § 7503

Explanation

This law says that, generally, if you have an account with an association to pay costs like taxes or insurance for your property, the association doesn't have to pay you interest on that money or invest it for you. The only exception is if your loan contract specifically requires that the money be kept in an interest-bearing savings account.

Except as specified by the loan contract or by Section 2954.8 of the Civil Code, an association shall have no obligation to pay interest to the borrower upon funds credited to an impound, trust, or other type of account for payment of taxes, insurance, or other charges relating to the property, or to invest them for the benefit of the borrower, unless the funds have been placed in an interest bearing savings account under the terms of the loan contract.
borrower account interest impound account trust account ...

Section § 7504

Explanation

This law allows associations to adjust various terms of real estate loans, such as interest rates and payment schedules, based on what's in the loan contract and market value changes. There are specific definitions for types of loans like fully amortized, nonamortized, and reverse annuity mortgages. Home loan adjustments must follow rules, including not exceeding 40-year terms, specific interest payment schedules, and conditions on loan balances. There's a limit on how much a loan's balance can exceed the property's appraised value, although this can adjust under particular conditions. Refinancing may be offered if a loan-to-value ratio exceeds set limits at maturity, but refinanced loans have additional requirements. Any changes to loan conditions must correspond to specific indices like interest rate shifts. Lastly, no prepayment charges can be imposed within 90 days of a required interest-rate change notice, and certain disclosures must comply with federal regulations.

Notwithstanding any other provision of law, an association may adjust the interest rate, payment, balance, or term-to-maturity on any loan secured by real property as authorized by the loan contract, and may receive a portion of the consideration for making a real estate loan in the form of a percentage of the amount by which the current market value of the property during the loan term or at maturity exceeds the original appraised value, subject to the limitations of subdivision (b) and Section 341 of P.L. 97-320 (H.R. 6267, the Garn-St. Germain Depository Institutions Act of 1982).
(a)CA Financial Code § 7504(a) For the purposes of this section:
(1)CA Financial Code § 7504(a)(1) “Fully amortized loan” means a loan in which, at inception of the loan, the entire principal balance, together with accrued interest, shall be payable with the scheduled term of the loan in substantially equal installments (excepting the last payment, which may be smaller than a regular scheduled payment).
(2)CA Financial Code § 7504(a)(2) “Home loans” means loans made on the security of one- to four-unit residential dwellings (including condominiums and cooperatives), combinations of these dwellings and business property (where no more than 20 percent of the total appraised value of the real estate is attributable to the business use), farm residences and combinations of farm residences and commercial farm real property.
(3)CA Financial Code § 7504(a)(3) “Nonamortized loan” means a loan in which none of the principal balance shall be payable prior to the maturity of the loan.
(4)CA Financial Code § 7504(a)(4) “Open end line of credit” means a loan plan in which the association reasonably contemplates repeated transactions; the association may impose interest from time to time on the unpaid principal of the loan plan, and the amount of credit that may be extended to the borrower during the term of the loan plan (up to any limit set by the association) is generally made available to the extent that any outstanding principal balance is repaid.
(5)CA Financial Code § 7504(a)(5) “Partially amortized loan” means a loan in which some but not all of the principal balance, together with accrued interest, shall be payable prior to the maturity of the loan.
(6)CA Financial Code § 7504(a)(6) “Reverse annuity mortgage” means an instrument which provides for periodic payments to be made to a homeowner based on accumulated equity. The payments are made monthly directly by the association, or are made through the purchase of an annuity from an insurance company. The loan becomes due on a specified date after disbursement of the entire principal amount of the loan or when a specified event occurs, such as sale of the property or death of the borrower. The interest rate on this instrument may be fixed, or may be adjusted periodically as provided by this section.
(b)CA Financial Code § 7504(b) Adjustments to the interest rate, payment, balance, or term-to-maturity on home loans shall be subject to the limitations of this subdivision.
(1)CA Financial Code § 7504(b)(1) The loan term shall not exceed 40 years, with interest payable at least semiannually, except as expressly authorized by this section.
(2)CA Financial Code § 7504(b)(2) The loan balance for other than nonamortized and open end line of credit loans shall be repayable in at least semiannual installments; provided, that loans on the security of farm residences and combinations of farm residences and commercial farm real property may be repayable in annual installments.
(3)CA Financial Code § 7504(b)(3) The loan may be fully amortized, partially amortized, nonamortized, a reverse annuity mortgage, or an open end line of credit loan. The loan contract may provide for the deferral of principal and capitalization of a portion of interest, or of all interest, in the case of loans to natural persons secured by borrower-occupied real property and on which periodic advances are being made.
(4)Copy CA Financial Code § 7504(b)(4)
(A)Copy CA Financial Code § 7504(b)(4)(A) At origination, the loan-to-value ratio may not exceed the maximum permitted by Section 7509, as determined by the association’s board of directors (but not more than 100 percent). During the term of the loan, the loan-to-value ratio may increase above the maximum percentage otherwise permissible if the increase results from an adjustment described in paragraph (3) or (5). The commissioner shall assume continued compliance with applicable loan-to-value limitations where the original loan-to-value ratio met the requirements of this paragraph, but in no event may the loan balance exceed 125 percent of the original appraised value of the security property during the term of the loan unless pursuant to clause (i) of subparagraph (B) of paragraph (5) of subdivision (b) or unless the loan contract provides that the payment shall be adjusted at least once every five years, beginning no later than the 10th year of the loan, to a level sufficient to amortize the loan at the then existing interest rate and loan balance over the remaining term of the loan. However, this 125 percent limitation shall not apply to the portion of a loan balance that is interest received in the form of a percentage of the appreciation in value of the security property.
(B)CA Financial Code § 7504(b)(4)(A)(B) If, at maturity of a loan secured by a home that provides for adjustments pursuant to paragraph (3) or (5), the ratio of the loan balance to the current market value of the security property exceeds the maximum permissible amount under Section 7509, the association may offer to refinance the loan if (i) the refinanced loan complies with subdivision (b) of Section 7509 and (ii) the loan contract for the refinanced loan requires that, in addition to full or partial amortization of the loan, the pro rata portion, based on the number of installments due annually, of estimated annual taxes and assessments on the security property be paid in advance to the association with each installment payment.
(5)CA Financial Code § 7504(b)(5) For any home loan secured by borrower-occupied property or property to be occupied by the borrower, adjustments to the interest rate, payment, balance, or term-to-maturity shall comply with the limitations of this paragraph.
(A)CA Financial Code § 7504(b)(5)(A) Adjustments to the interest rate shall correspond directly to the movement of an interest rate index or of a national or regional index that measures the rate of inflation or the rate of change in consumer disposable income, which index is readily available to, and verifiable by, the borrower and is beyond the direct control of the association. An association also may increase the interest rate pursuant to a formula or schedule that specifies the amount of the increase and the time at which it may be made and which is set forth in the loan contract. An association, in its sole discretion, may decrease the interest rate at any time.
(B)CA Financial Code § 7504(b)(5)(B) Adjustments to the payment and the loan balance that do not reflect an interest rate adjustment may be made if: (i) the adjustments reflect a change in a national or regional index that measures the rate of inflation or the rate of change in consumer disposable income, is readily available to and verifiable by the borrower, and is beyond the direct control of the association; (ii) in the case of a payment adjustment, the adjustment reflects a change in the loan balance or is made pursuant to a formula, or to a schedule specifying the percentage or dollar change in the payment as set forth in the loan contract; or (iii) in the case of an open end line of credit loan, the adjustment reflects an advance taken by the borrower under the line of credit, or a payment made by the borrower, that is permitted by the loan contract.
(C)CA Financial Code § 7504(b)(5)(C) Any combination of indices or a moving average of index values may be used as an index, and an association (i) may use more than one index during the term of a loan, if set forth in the loan contract and (ii) may provide for the selection of a substitute index by the association in the event the index being used is no longer available to or verifiable by the borrower or as otherwise provided in the loan contract.
(D)CA Financial Code § 7504(b)(5)(D) The loan term may be adjusted only to reflect a change in the interest rate, the payment or the loan balance. A loan contract may provide an association with the right to call the loan due and payable either after a specified period of time has elapsed following the date of the loan contract or as specified in a reverse annuity mortgage.
(6)CA Financial Code § 7504(b)(6) For any home loan secured by borrower-occupied property and on which the interest rate may be adjusted pursuant to paragraph (5), an association may not impose a prepayment charge on any prepayment made within 90 days of a required notice of an interest-rate increase with respect to the loan.
(c)CA Financial Code § 7504(c) Disclosure and notices for loans made pursuant to this section shall comply with the regulations codified in Section 563.99 of Title 12 of the Code of Federal Regulations.
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Section § 7505

Explanation

This law allows associations to engage in various activities with loans secured by real property, whether for residential (not including small dwellings) or nonresidential use. These activities include originating, investing, selling, purchasing, servicing, and participating in these loans.

However, the total amount an association can invest in nonresidential real property loans cannot exceed 40% of its assets.

(a)CA Financial Code § 7505(a) Notwithstanding any other provision of law, an association may originate, invest in, sell, purchase, service, participate, or otherwise deal in loans (including construction loans) on the security of real property for primarily residential (other than a one- to four-unit dwelling) or nonresidential use, subject to the limitations of this article.
(b)CA Financial Code § 7505(b) An association’s aggregate investment in real property loans for primarily nonresidential use under this section shall not exceed 40 percent of assets.
real property loans nonresidential use residential loans ...

Section § 7505.5

Explanation

This law allows savings associations to make loans for primarily residential real estate projects. These loans can be based on the borrower's creditworthiness and future income or can have other repayment assurances like guarantees from third parties. However, there is a limit: the total amount invested in such loans can't be more than 5% of the association's total assets.

(a)CA Financial Code § 7505.5(a) A savings association may make loans the principal purpose of which is to provide financing with respect to what is, or what is to become, primarily residential real estate, for which the association relies substantially on the borrower’s general credit standing and projected future income for repayment, without other security, or relies on other assurances for repayment, including guarantees or other obligations of third parties.
(b)CA Financial Code § 7505.5(b) An association’s aggregate investment in residential real estate loans described in subdivision (a) shall not exceed an amount equal to 5 percent of the association’s assets.
savings associations residential real estate financing borrower's credit standing ...

Section § 7506

Explanation

This law allows an association to provide a loan that is backed by assigning one or more existing loans, as long as the association is legally permitted to make or buy those underlying loans.

Notwithstanding any other provision of the law, an association may make a loan secured by an assignment of a loan or loans to the extent that it could, under applicable law and regulations, make or purchase the underlying assigned loan or loans.
loan security loan assignment underlying loans ...

Section § 7507

Explanation

This section allows associations to make loans or investments secured by real estate, even if these activities don't meet typical legal requirements, like loan-to-value ratios or borrower certifications. However, they must follow certain rules. These include not investing more than 5% of their total assets in such loans at any time and ensuring that each investment is well-documented as prudent. Additionally, these loans must meet specific regulatory compliance as outlined in another section.

(a)CA Financial Code § 7507(a)  An association may make loans or advances of credit, or invest in interests therein, on the security of real property, which loans, advances of credit, or investments are not otherwise authorized under the law because of the following reasons:
(1)CA Financial Code § 7507(a)(1) The loan-to-value ratio, stated maturity, or loan amount is in excess of the maximum allowable limits.
(2)CA Financial Code § 7507(a)(2) Lack of any required borrower certification or required private mortgage insurance.
(3)CA Financial Code § 7507(a)(3) The loan would cause an applicable percentage-of-assets category to be exceeded.
(4)CA Financial Code § 7507(a)(4) A combination of the foregoing factors.
(b)CA Financial Code § 7507(b) Investments made under the authority of this section are subject to the following restrictions:
(1)CA Financial Code § 7507(b)(1) No association shall have investments under this section aggregating at any one time more than 5 percent of its total assets.
(2)CA Financial Code § 7507(b)(2) Each investment made under this section shall be fully documented to support the conclusion that it was made on a prudent basis.
(3)CA Financial Code § 7507(b)(3) Loans made pursuant to this section shall comply with subparagraph (D) of paragraph (5), and paragraph (6), of subdivision (b), of Section 7504, where applicable.
real property loans loan-to-value ratio borrower certification ...

Section § 7509

Explanation

This California law limits how much you can borrow with a real estate loan based on the value of the property. Generally, loans can't exceed the property's market value, and the loan-to-value (LTV) ratio must follow limits set by an association's board. For home loans over 90% of the property's value, only the borrower's funds or those of their family or employer can be used as security, and the loan can't exceed the property's appraised value.

Any amount borrowed over 80% of the property's value needs to be insured by a qualified private mortgage insurer. All high LTV loans require board approval, recorded in meeting minutes. Loans on undeveloped land can't exceed 80% of its value. The total of all loans on the property, including the new loan, can't exceed set LTV ratios, except for loans paid off with the new loan. Property value is determined using current appraisals.

(a)Copy CA Financial Code § 7509(a)
(1)Copy CA Financial Code § 7509(a)(1) At the time of origination, a real estate loan may not exceed 100 percent of the market value of security property. An association shall, by vote of its board of directors, establish maximum loan-to-value ratios for loans made on the security of real estate, and the resolution adopting those ratios shall be included in the minutes of the directors’ meeting. Home loans, as defined in Section 7504, made on the combined security of real estate and savings accounts may be made in excess of the maximum loan-to-value ratios adopted pursuant to this subdivision with the excess secured by the savings account.
(2)CA Financial Code § 7509(a)(2) However, for loans originated in excess of 90 percent of the initial appraised value of the security property, the savings account shall consist only of funds belonging to the borrower, the borrower’s family, or the borrower’s employer, and the loans shall not exceed the appraised value of the real estate.
(b)CA Financial Code § 7509(b) With respect to home loans originated or refinanced in excess of 90 percent of the appraised value of the security property, that part of the unpaid balance that exceeds 80 percent of the property value shall be insured or guaranteed by a mortgage insurance company that the Federal Home Loan Mortgage Corporation has determined to be a “qualified private insurer.”
(c)CA Financial Code § 7509(c) With respect to all other loans on the security of real estate originated in excess of 90 percent of the appraised value of the security property, an association’s board of directors shall approve each of these loans prior to its origination and that approval shall be recorded in the minutes of its meeting.
(d)CA Financial Code § 7509(d) An association shall not make a loan secured by unimproved real property if the loan-to-value ratio would exceed 80 percent of the appraised value of the unimproved real property securing the loan.
(e)CA Financial Code § 7509(e) In determining compliance with maximum loan-to-value-ratio limitations for real estate loans, at the time of making a loan, an association shall add together the unpaid amount, or in the case of a line-of-credit loan, the approved credit limit, of all recorded loans secured by prior mortgages, liens, or other encumbrances on the security property that would have priority over the association’s lien, and shall not make the loan unless the total amount of those loans, including the loan to be made but excluding loans that will be paid off out of the proceeds of the new loan, does not exceed the applicable maximum loan-to-value-ratio limitations prescribed in this subdivision. In determining the value of the real estate security, an association shall use the current appraised value of the security property, which may include any expected value of improvements to be financed.
(f)CA Financial Code § 7509(f) “Value” for a real estate loan means the market value of the real estate.
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