This article was originally published for the California Mortgage Association on December 4th, 2024. You can find the article in its original format here: AB 3108 – Misrepresentations on Business Purpose and Residential Bridge Loans
In September, Governor Newsom approved Assembly Bill 3108 (“AB 3108”) to amend Section 4973 of the Financial Code and—crucially—to amend Section 532f of the Penal Code (“532f”). This amendment to the penal code now makes it a crime to file a document related to a mortgage loan transaction with the county recorder that contains a material misstatement, misrepresentation, or omission, even if not deliberate. The threshold for criminal mortgage fraud has been lowered, and lenders, brokers, and loan originators need to be aware just how low the threshold has become. AB 3108 becomes effective January 1, 2025.
Purpose of AB3108
Legislators found that predatory lending had been on the rise since 2008, despite legislation aimed at preventing such behavior. Lawmakers specifically pointed out a report from the Consumer Federation of California that showed California ranked fourth in the country in “mortgage fraud risk.” In an attempt to clarify the mortgage fraud statutes and give consumers better recourse to fight predatory lending, lawmakers presented AB 3108. Essentially, AB 3108 is a consumer protection bill aimed at protecting borrowers from predatory lending and providing better tools to fight predatory lending.
What did AB 3108 Change?
The changes to 532f are subtle, but lenders making mortgage loans, whether for business or consumer purposes, need to concern themselves with thes changes. First, in section (a)(4) of 532f, AB3108 changed one word to reduce the threshold for committing fraud. Instead of having knowledge of a “deliberate misstatement, misrepresentation, or omission” the misstatement, misrepresentation, or omission must now be “material.” This is crucial, because a person can now commit mortgage fraud if they have knowledge that a filed document contains a material misstatement, misrepresentation, or omission. The previous version of 532f required an intentional act; it required that the filing party deliberately filed a fraudulent document.
While AB 3108 does make it easier for prosecutors to apply 532f in mortgage fraud cases, there is still a knowledge requirement that must be addressed. Legislators passed AB 3108 to combat predatory lending, but fraudulent information can often come from the borrower during the loan application process. In this case, the lender would not necessarily have knowledge of fraudulent information, and the burden is on the prosecutors to prove the lender had actual knowledge of fraudulent information. The knowledge requirement may be on prosecutors to prove, but lenders should exercise extra diligence and caution when maneuvering within AB 3108. If a lender becomes aware of fraudulent information provided by a borrower, they should not proceed with the loan.
New Guidelines for Business Purpose Loan Brokers and Originators
Penal Code 532f was further amended to expand the list of offenses for mortgage brokers and loan originators by adding sections (b)(1) and (b)(2). Under the new language, brokers and originators may commit mortgage fraud if they have the intent to defraud and commit one of the following acts:
- Instruct or deliberately cause a borrower to sign documents for a business, commercial, or agricultural loan, with knowledge the loan proceeds are actually primarily for personal, family, or household use; or
- Instruct or deliberately cause a borrower to sign documents for a bridge loan with knowledge the loan proceeds will not be used to acquire or construct a new dwelling.
This is a notable change as this is not a simple revision of wording like in section (a)(4) of 532f, but entirely new language added to 532f that did not previously exist. These additions now require brokers and originators to be cautious when working with business purpose loans – if they have knowledge that the purpose of the mortgage loan is actually consumer and they proceed with the loan anyway, they may now face criminal consequences that were not a concern before AB 3108. Before the amended language takes effect, mortgage brokers and originators who work with business purpose loans should review their due diligence practices.
Brokers and originators can take action to protect themselves, including confirming the use of loan proceeds and requiring borrowers to certify the loan proceeds will actually be for business, commercial, or agricultural purposes. If a broker or originator becomes aware that this is not the case, they should not proceed with the loan.
Changes to Bridge Loan Underwriting
Brokers and originators should also be careful when working on a bridge loan under the new changes. For purposes of the new section, a bridge loan is defined as a temporary loan with a maturity date within one year or less, used for the acquisition or construction of a dwelling intended to become the borrower’s principal residence. In a similar vein to business purpose loans discussed above, brokers and originators need to be cautious when the loan is a bridge loan, and should confirm their due diligence practices require written confirmation from the borrower that funds from the bridge loan are actually going to be used to acquire or construct a dwelling in which the borrower intends to reside.
If the broker or originator becomes aware that the bridge loan is not intended to acquire or construct a new dwelling, then criminal consequences now exist for proceeding with the loan anyway. In good news for lenders who only work within the business purpose world, loans that fall under this definition are very likely to be deemed to have a consumer purpose since the dwelling would become the borrower’s principal residence. While business purpose brokers and originators should still be aware of this new criminal violation, Section (b)(2) is more concerning for those lenders who work with consumer loans.
Risks
The risks of violating Section 4973 of the financial code or Section 532f of the Penal Code have not changed with AB 3108. Violations of Section 4973 still carry civil liability. Meanwhile, violations of Section 532f are considered public offenses punishable as a misdemeanor by imprisonment in a county jail for up to one year, or as a felony with imprisonment ranging from 16 months to three years. Considering the renewed emphasis on mortgage fraud—evidenced by the passing of AB 3108—lenders, brokers, and originators should take extra caution and re-examine their diligence policies to ensure they are not at risk of violating either of these revised statutes.
Lenders, brokers and originators who want to further understand the impact of these changes on the loans or products they offer, or have questions about these revisions, should consult with legal counsel to provide advice for their specific situation.
This article was not prepared as legal advice, lenders, brokers and originators who want to further understand the impact of these changes on the loans or products they offer, or have questions about these revisions, should consult with legal counsel to provide advice for their specific situation.
