California’s AB 3108: New Felony Charges for Mortgage Brokers
When a Borrower Doesn’t Qualify for Conventional Financing—Think Twice Before Defaulting to Non-QM!
It’s tempting to label a loan as investment purpose when a borrower doesn’t meet conventional guidelines—even when they plan to occupy the home as a primary residence.
Well, that loophole just slammed shut! California’s AB 3108 just changed the game. The gig is up!
According to A.J. Dhaliwal and Sherwin F. Root of Sheppard, Mullin, Richter & Hampton, LLP, the party is over—and now, misrepresenting occupancy can land you a felony charge!
If you do business purpose loans in any state, this is a wake-up call!
Effective, January 1, 2025
Assembly Bill 3108 makes it felony mortgage fraud for a “mortgage broker or person who originates a loan” to intentionally:
- Instruct or otherwise deliberately cause a borrower to sign documents reflecting the terms of a business, commercial, or agricultural loan, with knowledge that the borrower intends to use the loan proceeds primarily for personal, family, or household use.
- Instruct or otherwise deliberately causes a borrower to sign documents reflecting the terms of a bridge loan, with knowledge that the loan proceeds will be not used to acquire or construct a new dwelling. For purposes of this subdivision, a bridge loan is any temporary loan, having a maturity of one year or less, for the purpose of acquisition or construction of a dwelling intended to become the consumer’s principal dwelling.
What You Should Do?
According to A.J. Dhaliwal and Sherwin F. Root all mortgage lenders and mortgage brokers should have policies in place for determining and documenting when loans are made for business purposes. This is the time to review those policies and make sure they are as protective as possible. At a minimum, those policies should include the following:
- Obtain a handwritten letter signed in the lender’s presence by the borrower detailing the business purpose of the loan.
- Gather corroborating evidence of the business purpose, such as financial statements and invoices.
- Have the applicant sign a business purpose certificate.
- If possible, fund the loan proceeds to a business bank account.
- Consider recording a telephone conversation with the applicant discussing the business purpose, but be sure to inform the applicant that the call is being recorded, as required by California law.
- Consider obtaining a legal opinion from the borrower’s counsel.
Having these policies in place could significantly reduce the risk that a borrower will later claim that the mortgage lender or broker has committed felony mortgage fraud in violation of AB 3108.
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