For brokers in California, adhering to the strict compliance requirements of the California Department of Real Estate (DRE) when issuing loan documents is crucial. Failing to meet DRE compliance requirements, which range from borrower disclosures to special regulations for small loans, can result in costly penalties and legal fees. In this article, we’ll cover everything you need to know about DRE compliance for loan documents.
Required Disclosures for Loan Transactions
DRE brokers must provide specific disclosures to borrowers within three days of receiving a loan application and in the language primarily used for negotiation. These disclosures must also be retained for three years. The required disclosures include:
- Mortgage Loan Disclosure Statement (Form RE 885 for interest-only loans on 1-to-4 family properties or Form RE 882 for all other loans)
- Privacy Policy
- ECOA Appraisal Disclosure
- Patriot Act Disclosure
- Multi-Disclosure (ECOA, Insurance)
- Fair Lending Notice (Form RE 867A) – provided at the time of application
- Borrower Authorization Form
- Hazard Insurance Disclosure
Brokers must include their DRE license information, anticipated compensation, and details regarding the use of broker-controlled funds in these disclosures. Additionally, the DRE licensing information telephone number must be provided. If any costs, expenses, or loan terms materially change after the initial disclosure, brokers are responsible for timely updating the borrower with revised disclosures.
For brokers who represent the borrower in the underlying real estate transaction while also arranging the loan, an additional written disclosure must be provided to all parties within 24 hours. This disclosure must clearly state the broker’s role, the form of compensation, the amount, and its source.
Special Considerations for Small and Nontraditional Loans
The DRE expands its rules and restrictions for certain loan types, particularly small loans and nontraditional mortgage products. Article 7 of the California Real Estate Regulations applies to certain small loans, also referred to as “regulated loans.” Below we’ll cover what Article 7 entails, as well as what compliance regulations are required for nontraditional loans.
Regulated Small Loans (Article 7 Loans)
Article 7 of the California Real Estate Regulations applies to small loans, referred to as “regulated loans,” which are defined as:
- Loans under $30,000 for bona fide senior liens
- Loans under $20,000 for bona fide junior liens
Article 7 limits the fees and costs that can be collected on these loans, which vary depending on lien position and loan term. It also establishes rules regarding:
- Maximum allowable monthly payments
- Required loan terms
- Limits on late charges and prepayment penalties
To avoid potential violations, brokers may find it simpler to originate loans exceeding the $30,000 threshold.
Nontraditional Mortgage Products
For loans secured by 1-to-4 family properties where principal or interest payments may be deferred, negatively amortized, or structured as balloon payment loans, additional compliance steps are required. Brokers must adhere to:
- The Interagency Guidance on Nontraditional Mortgage Product Risks, which provides federal guidelines on underwriting, risk management, and consumer protection
- The Statement on Subprime Mortgage Lending, which addresses risks associated with adjustable-rate mortgages (ARMs)
Moreover, advertisements for these loan products must comply with California Civil Code Section 10235 and California Code Regulation 2848, specifically subsections (a)(17-18), which outline mandatory information to be included in advertisements.
How to Ensure DRE Compliance and Avoid Costly Fees
California’s DRE compliance requirements are complex, which makes careful adherence crucial to avoid potential violations. Whether dealing with standard loan disclosures, regulated small loans, or nontraditional mortgage products, brokers must stay informed and ensure DRE compliance at every step.
Geraci LLP is here to assist with navigating the intricacies of California’s DRE requirements. If you have questions regarding compliance, disclosures, or specific loan structuring, our Banking & Finance team is ready to provide guidance. Click here to contact our team today to learn more.
