CALIFORNIA DEPARTMENT OF CORPORATIONS

FINAL STATEMENT OF REASONS

FOR THE ADOPTION OF RULES UNDER THE

CALIFORNIA FINANCE LENDERS LAW AND THE

CALIFORNIA RESIDENTIAL MORTGAGE LENDING ACT

As required by Section 11346.2 of the Government Code, the California

Corporations Commissioner (Commissioner) sets forth below the reasons for the adoption

of Sections 1436 to Article 3 of Subchapter 6 and 1950.314.8 to Article 9 of Subchapter

11.5 of Title 10 of the California Code of Regulations (10 C.C.R. Sections 1436 and

1950.314.8).

I. In General

The Department of Corporations (Department) licenses and regulates finance

lenders and brokers under the California Finance Lenders Law, and residential

mortgage lenders and servicers under the California Residential Mortgage Lending Act.

These laws require licensees to comply with certain requirements relating to books and

records, examinations, and reporting. See Financial Code Sections 22156, 22157,

22159, 22701, 50124, 50302, 50307, and 50314. Moreover, these laws prohibit

licensees from engaging in certain unlawful practices such as unconscionable contracts,

loans that do not take into consideration the borrowers’ ability to repay, fraudulent

underwriting practices, unsafe and injurious practices, and false advertising, as

specified. Licensees must also provide clear statements concerning loans, as specified.

See, as examples, Financial Code Sections 22161, 22163, 22164, 22302, 22714,

50204, 50308, and 50322.

On November 14, 2006, the Conference of State Bank Supervisors (CSBS) and

the American Association of Residential Mortgage Regulators (AARMR) distributed

Guidance to state agencies that regulate mortgage lenders. The Guidance is available

on the AARMR website at www.aarmr.org. The Guidance addresses risks posed by

nontraditional mortgage products such as interest-only loans. In addition, the Guidance

includes directives for lenders involved in mortgage programs directed at subprime

borrowers. As stated by CSBS and AARMR in their joint press release, also available

on their website, the Guidance serves to inform and protect consumers and enhance

the safety and soundness of the industry. Accordingly, CSBS and AARMR encouraged

state regulatory agencies to adopt the guidance and to issue it for use by regulated

entities. Moreover, on July 17, 2007, CSBS and AARMR published additional guidance

in its Statement on Subprime Mortgage Lending, to address similar concerns of risk and

payment shock associated with certain adjustable rate mortgage loans. The above-

referenced Guidance on Nontraditional Mortgage Product Risks, together with the

recent Statement on Subprime Mortgage Lending, are collectively referred to as the

“Guidance” below.

In general, this rulemaking is necessary to carry out the above-referenced

Guidance for nontraditional and adjustable rate mortgage products. The rulemaking

requires licensees operating under the California Finance Lenders Law and the

California Residential Mortgage Lending Act to: (1) implement best practices, as

Document PRO 01/07-C-Final

defined, on a continuous basis including the Guidance; (2) report annually to the

Department, in relation to the Guidance, on whether they have made or arranged

nontraditional and adjustable rate mortgage products, whether they have implemented

risk-management best practices, whether they have put into place internal controls or

procedures, as specified, and to also report annually on the number of any consumer

complaints; and (3) maintain specified documentation as part of their books and

records, and make the documentation available to the Commissioner upon request; (4)

require clear disclosures for nontraditional and adjustable rate loans, as specified; and

(5) prohibit certain false, misleading, and deceptive advertising.

II. The Guidance

The Guidance sets forth various directives for mortgage lenders and brokers

offering nontraditional and adjustable rate mortgage loan products, which are designed to

influence loan terms and underwriting standards, risk management practices, consumer

protection issues, and operating practices. As explained by CSBS and AARMR, the

Guidance is needed for several reasons. First, the Guidance assists state regulators of

mortgage companies to promote consistent regulation in the mortgage market.

Additionally, the Guidance clarifies how mortgage lenders can offer nontraditional and

adjustable rate mortgage products in a way that clearly discloses the risks that borrowers

may assume. (For example, see Section I, “Introduction,” discussion of the Guidance on

Nontraditional Mortgage Product Risks.) Moreover, the Guidance is needed to address

risks associated with the growing use of mortgage products that allow borrowers to defer

payment of principal and/or interest, given that borrowers may not fully understand the

risks of these nontraditional loan products. (See Section II, “Background,” discussion of

the Guidance on Nontraditional Mortgage Product Risks.)

Consistent with the stated objectives of the Guidance, Sections 1436 and

1950.314.8 of this rulemaking set forth requirements for best practices that are needed

to ensure that mortgage loan providers will effectively assess and manage risks

associated with nontraditional and adjustable rate loan products that are defined by the

Guidance. Moreover, the rulemaking also sets forth reporting and books and records

requirements that are necessary to enable the Department to carefully review the risk-

management practices, policies and procedures in this area. This rulemaking also

requires certain disclosures and prohibits false advertising, as specified, in connection

with nontraditional and adjustable rate mortgage loans.

III. Recent Hearings and Findings

On January 31, 2007, the Senate Banking, Finance and Insurance Committee

held an informational hearing on nontraditional mortgage products and published a

report entitled, “Sustainability, Not Attainability – An Examination of Nontraditional

Residential Mortgage Lending Products and Practices.” In the “Key Findings”

discussion of the staff summary report, the following consensus items, as summarized,

also support the need for this rulemaking: home ownership should be sustainable;

borrowers may not understand the terms of nontraditional loan products; loans may be

mismatched for certain borrower profiles; the state should apply the Guidance to state

regulated lenders and brokers in a uniform fashion; borrowers should receive

Document PRO 01/07-C-Final

meaningful disclosures concerning nontraditional loan products; and the need for more

mechanisms to help protect borrowers from unscrupulous mortgage professionals. The

committee report also includes a background paper that makes certain findings

concerning recent trends in the California mortgage market such as the increase of

nontraditional mortgage loan products, the financial risks assumed by mortgage

providers, and the rising level of delinquencies. On March 26, 2007, the Senate

Banking, Finance and Insurance Committee held a follow-up informational hearing

entitled “Reactions to the Recent Subprime Mortgage Collapse.” The Committee’s

background paper includes additional information about recent problems experienced in

the subprime market. The background paper also describes the proposed “Statement

on Subprime Mortgage Lending” dated March 2, 2007, proposing additional guidance to

help address subprime loan problems including certain adjustable rate mortgages. The

Commissioner of Corporations wrote a letter dated May 7, 2007 to the Office of the

Comptroller of the Currency, supporting the principles of this Statement on Subprime

Lending.

Sections 1436 and 1950.314.8 of this rulemaking are needed to clarify and make

specific the manner in which licensees will be required to follow the Guidance, including

the recent Statement on Subprime Lending published by CSBS and AARMR on July 17,

2007, thereby helping to help address the findings of the recent committee hearing and

the report and background paper prepared in connection with those hearings.

Accordingly, pursuant to Government Code Section 11346.2(a)(2), the Department is

relying upon and hereby identifies the committee report and the background paper, as

described above, in this rulemaking.

Following these hearings, Senator Machado authored and the Governor signed

Senate Bill 385 (Chapter 301, Statutes of 2007). Therefore, this rulemaking also helps

clarify and make specific the manner in which the Department will apply the Guidance, in

accordance with Financial Code Sections 22171 and 50333 as added by SB 385. Sections

22171 and 50333 have been added as additional References to the notes of these

proposed rules.

IV. Sections 1436 and 1950.314.8

The Department licenses and regulates mortgage loans under both the California

Finance Lenders Law and the California Residential Mortgage Lending Act. Under the

Guidance, mortgage providers that do not adequately manage risks associated with

nontraditional and adjustable rate loan products will be asked to take remedial action.

Accordingly, this rulemaking is needed to clarify the obligations of licensees (e.g., best

practices, reports, and books and records), thereby specifying the circumstances under

which a violation of a rule may give rise to Department enforcement activity. It is also

noteworthy that current law sets forth various limitations and prohibitions on lending

activities. For example, current law prohibits finance lenders from failing to take into

consideration the borrowers ability to repay, as specified, and prohibits them from making

unconscionable loans. See Financial Code Sections 22302, 22714. Moreover, existing

law prohibits licensees from engaging in fraudulent underwriting practices, and unsafe

and injurious practices, as specified. See Financial Code Sections 50204 and 50322.

Given the existing enforcement mechanisms in place to help guard against the risks

Document PRO 01/07-C-Final

associated with loans, including nontraditional and adjustable rate mortgage products,

the rulemaking may also enable the Department to detect patterns and practices of

other violations of law.

Sections 1436 and 1950.314.8, subsection (a), require licensees to implement

best practices, as specified. Deference will be given to the licensees to implement and

apply best practices that meet their operational needs so long as they include lawful

processes, policies, and procedures, as well as practices set forth in the Guidance.

Thus, the rulemaking is needed to provide flexibility and clarity to licensees to help carry

out the stated objectives of the Guidance. Additionally, the rules require licensees to

implement these practices on a continuous basis. This provision of the rule is needed

to ensure that licensees understand that mere adoption of best practices, as specified,

is not enough. Licensees also have an obligation to ensure that these practices are

implemented on a continuous basis with respect to their nontraditional and adjustable

rate mortgage products. Likewise, the rule clarifies the obligation of the Department to

check for continued implementation of the Guidance. Although the reference to

“including but not limited to” has been deleted from the initial text, subsection (a) still

provides licensees with flexibility to adapt to changed circumstances and other future

standards that may be adopted including any amendments to the Guidance.

In addition, Sections 1436 and 1950.314.8, subsection (b), specify reporting

requirements that are needed to enable the Department to scrutinize the adoption and

implementation of best practices required by subsection (a) of the proposed rule. To

help clarify and make specific the timing of the special report, subsection (b) requires

licenses to submit it as part of the annual report, pursuant to Financial Code Sections

22159 and 50307. This provision will help eliminate the need for submitting two

separate reports at different times each year. The rule also requires a separate written

report as an addendum to the annual report, to help specify the format of the report

required by the rule. In addition, licensees must state whether they have made or

arranged nontraditional and adjustable rate mortgage products as defined by the

Guidance, explain how they have implemented best practices, explain whether and how

they have put into effect specified internal controls and procedures, and indicate

whether they have received consumer complaints regarding loans that are subject to

the Guidance, including resolved and unresolved complaints, and workout

arrangements, as specified. These provisions are needed to help licensees understand

their reporting obligations. More importantly, this information will help the Department

understand the scope of continuous implementation by each licensee. The Department

can also use these reports to assess the level of compliance with the Guidance among

the licensees. Therefore, the Department can prioritize examinations, including

examinations conducted under Financial Code Sections 22701 and 50302, to review

implementation of the best practices, as required by the rule, including any internal

controls and procedures.

Under subsection (b), licensees that make or arrange nontraditional or adjustable

rate mortgage loans, as specified, must also provide information concerning their

products in a form prescribed by the Department. The form (entitled Nontraditional

Mortgage Loan Survey and dated 5/1/07) is available on the Department’s website at

www.corp.ca.gov. This information is needed because, as described above, certain

Document PRO 01/07-C-Final

nontraditional and adjustable rate mortgage loans pose higher risks than do traditional

amortizing mortgage loans. In addition, nontraditional and adjustable rate mortgage

lending activities have drawn increased scrutiny from a wide range of sources, with

concerns being expressed regarding the possibility that some borrowers are being

exposed to undue levels of risk given their financial and repayment capacity, possibly

without their full understanding of the terms and features of the mortgage loan products

they are obtaining. It is in the interests of the Department, its licensees, and the

borrowers to ensure that the needs of mortgage customers are met in a manner that is

safe and sound for the licensees, yet does not expose the borrowers to an undue level

of risk that they may not fully understand. In order to be able to develop appropriate

guidance for its licensees and its examination staff, the Department already conducted

a survey to obtain this additional information regarding the extent and nature of the

nontraditional mortgage loan products being offered by its licensees. Accordingly, this

rule formally adopts the information requirement and form on an ongoing and annual

basis.

Sections 1436 and 1950.314.8, subsection (c), require licensees to maintain

documentation including copies of complaints and responses or explanations of how the

complaints were resolved, documentation of internal controls and procedures, and any

loan documentation required by law, as specified. These provisions are needed to

clarify and make specific the types of books and records that must be maintained by

licensees under various books and records requirements including Financial Code

Sections 22156, 22157, 50124 and 50314. Moreover, the rule enables the Department

to have access, upon request, to documentation for the purpose of examining

compliance by licensees.

Subsection (d) requires licensees to deliver, as specified, certain disclosures to

borrowers concerning payment scenarios and loan balance scenarios, among various

nontraditional and adjustable rate mortgage loan products. The disclosures may be

provided on one of three forms. First, the Department form (entitled Comparison of

Sample Mortgage Features: Typical Mortgage Transaction and dated 8/1/07) is available

on the Department’s website at www.corp.ca.gov. This form of disclosure is needed to

help borrowers understand the payment obligations and loan balance obligations of various

nontraditional loan products, and to help them make an informed product choice. By

requiring the information within three days of loan application or obligation on the note,

whichever is earlier, the rules ensure that information is provided to borrowers at the

earliest possible time, and to help them avoid misunderstandings before they commit

themselves to the loans or pay loan documentation fees. The rule and form of disclosures

also help carry out existing laws, which require clear statements concerning charges and

other costs of loans, and help ensure that material information is provided in a conspicuous

manner. The sample form is based on information proposed by the Department of Real

Estate in its Form RE 885, to provide greater uniformity of disclosures in connection with

nontraditional and adjustable rate loan products. This table format helps provide a one-

page and user-friendly comparison chart with helpful examples, so borrowers can compare

payment and loan balance obligations of various loan products including the loan proposed

for the borrower. In addition, the licensee may use the Form RE 885 when it is provided by

a real estate broker, as specified. Finally, the Department has also provided licensees with

the flexibility to use their own form, provided it meets certain conditions.

Document PRO 01/07-C-Final

Subsection (e) prohibits certain advertising that is deemed false, misleading, and

deceptive for loans subject to the Guidance. This subsection is needed to help curb

misrepresentations in connection with nontraditional mortgage products and to help carry

out the consumer protection goals of the Guidance. The provisions also clarify and make

specific the types of representations that constitute prohibited advertising, so licensees can

understand and guard against them as they implement the Guidance on an ongoing basis.

In addition, the proposed rule also achieves greater uniformity among mortgage loan

providers, since the Department of Real Estate is proposing the same advertising

prohibitions in its rules as well.

Finally, subsection (f) clarifies the application of the rule. This clarification is needed

to ensure that lenders understand that the rule does not apply to commercial loan, as

specified, and applies to loans secured by residential real property located in this state

improved by a one-to-four family dwelling.

DETERMINATIONS

The Commissioner has determined that the adoption of the regulation does not

impose a mandate on local agencies or school districts, which requires reimbursement

pursuant to Part 7 (commencing with Section 17500) of Division 4 of the Government

Code.

ALTERNATIVES CONSIDERED

No alternative considered by the Department would be more effective in carrying out

the purpose for which the regulation is proposed, or would be as effective and less

burdensome to affected private persons, or would lessen any adverse impact on small

businesses.

ADDENDUM, REGARDING PUBLIC COMMENTS

No request for hearing was received during the 45-day public comment period,

which ended on July 2, 2007. Accordingly, no hearing was scheduled or held.

REVISIONS IN RESPONSE TO COMMENTS

In summary, the Department received comments raising concerns of necessity and

clarity with regard to the proposed rules: 21 comments during the 45-day comment period;

4 comments during the first 15-day comment period; and 4 comments during the second

15-day comment period. In response to concerns of necessity, commentors are directed

to the Initial Statement of Reasons describing, in detail, the need for each provision of the

rule.

It is noteworthy the Department has incorporated into the rule the principles of the

Statement on Subprime Lending. This document was published by CSBS and AARMR on

July 17, 2007. This additional Guidance helps complement the existing Guidance on

Nontraditional Mortgage Product Risks. As discussed in the Initial Statement of Reasons,

Document PRO 01/07-C-Final

the additional Guidance is incorporated into the rule to help address problems with

subprime loans including certain adjustable rate mortgages. The revisions are needed to

ensure lenders implement best practices to manage risks associated with these products,

in addition to providing reports, making disclosures, avoiding misleading ads, and retaining

books and records (including workout arrangements), as specified in the text of the rule.

Accordingly, appropriate references have been added in subsections (a), (b), (d) and (e), to

accomplish the goal. For the purpose of defining adjustable rate mortgage, the rule

incorporates the definition provided by the new Guidance published by CSBS and AARMR

on July 17, 2007.

The remaining changes, to address concerns of clarity, are outlined below, including

a summary of (and reasons for) each change:

Subsection (a):

•

Define “best practices” to mean lawful processes, policies, and procedures to

manage risks associated with nontraditional mortgage products and adjustable rate

mortgages as defined by the collective Guidance. This change will clarify these

terms.

•

Delete the reference to “appropriate” and, instead, clarify that best practices to

manage loan product risk will include lawful processes, policies, and procedures.

This revision also helps clarify the meaning of “best practices.”

•

Incorporate a reference to the recent Statement on Subprime Mortgage Lending,

and delete the reference to “including but not limited to.” These changes help clarify

the best practices implemented by lenders.

•

Refer to the Guidance on Nontraditional Mortgage Product Risks and the Statement

on Subprime Mortgage Lending collectively as the “Guidance” to ensure clarity

throughout the rule provisions.

Subsection (b):

•

Provide technical language revisions to conform to other provisions of the rule, and

clarify the rule’s application. These changes include adding references to

“adjustable rate mortgage,” “processes,” and “any,” and including a reference to

“best practices.”

•

Require reporting of workout arrangements used for resolved complaints, and

provide a definition of workout arrangement.

•

Clarify the report to include education of agents as well as employees.

•

Delete the reference to “risk management” practices to conform with other

provisions of the rule.

Subsection (c):

Document PRO 01/07-C-Final

•

Require lenders to retain any workout arrangement with complaint documentation,

as specified.

•

Add a reference to adjustable rate mortgage to conform to other provisions.

Subsection (d):

•

Delete the phrase “readily understood by a person unfamiliar with mortgage loan

terms and conditions, material,” and at “a minimum.” In lieu of these phrases, clarify

that disclosures must be provided in the forms prescribed by the rule.

•

Provide that the Form RE 885 of DRE (provided by a licensed real estate broker)

shall satisfy the disclosure requirements. This clarifies the application of the rule,

and confirms that either the Department’s form or the DRE form will suffice.

•

Apply the disclosure provision to loans that are subject to the Guidance, as

specified, to help clarify application.

•

Allow the use of any other disclosure form to compare payment scenarios and loan

balance scenarios of products that are subject to the Guidance, provided the form

compares monthly payments and loan balance of these products offered and

reflects the borrower’s proposed loan amount.

•

Clarify that statements must be on any one of the specified forms.

Subsection (e):

•

Apply the advertising provisions to loans that are subject to the Guidance, as

specified, to help clarify application of the rule’s provisions.

•

Tailor the provisions to advertisements for sake of clarity, and require disclosures

when applicable to the advertised loan products.

Subsection (f):

•

Add subsection (f) to clarify that the rule does not apply to commercial loans, and

applies to loans secured by residential real property, as specified.

Other Revisions:

•

Provide additional code references in the Notes of the text.

•

Revise certain headings to refer to Nontraditional, Adjustable Rate, and Mortgage

Loan Products, to clarify the scope of the proposal.

•

Revise the “Comparison of Sample Mortgage Features: Typical Mortgage

Document PRO 01/07-C-Final

Transaction” form to: provide instructions to lenders on how to complete the form;

provide that a lender may add or delete columns to reflect only loan products

offered by the lender; add an additional column consistent with DRE’s form, to

disclose information concerning the loan product (e.g., an ARM or other product not

covered by the other existing columns) proposed by the lender for the borrower; and

specify the rule’s requirements for delivery of the form to the borrower. This form is

incorporated by reference in subsection (d).

•

Revise the “Nontraditional Mortgage Loan Survey” form to: clarify the heading of the

form, delete the “other” category in Section 4.g. and, instead, require reporting of

adjustable rate mortgages covered by the Statement of Subprime Lending; and

provide a definition of adjustable rate mortgage consistent with the Statement on

Subprime Lending. This form is incorporated by reference in subsection (b).

The above-reverenced changes are intended to clarify the application of the

proposed rules and forms, and to address comments received during the public comment

periods.

COMMENTS RECEIVED DURING THE 45-DAY COMMENT PERIOD

The Department received 21 written comment letters during the 45-day public

comment period. Those comments are summarized below, together with the Department’s

responses.

1. COMMENTOR: E-mail dated May 21, 2007, from Peter Shoobridge on behalf of

Aspen Pacific Funding, LLC.

COMMENT: Commentor states the Guidance issued by CSBS and AARMR is

intended to protect consumers from the misleading and deceptive practices prevalent

within the residential mortgage sector (mostly sub-prime). The proposed regulations

appear to have no relevance to the business of commercial real estate finance. Thus,

commentor recommends exempting commercial loans from the proposed regulations.

RESPONSE: The Department agrees with the commentor’s suggestion and has

revised the rule to exclude commercial loans made or arranged by licensed lenders.

2. COMMENTOR: E-mail dated May 24, 2007, from Rob Pivnick with Goldman

Sachs Commercial Mortgage Capital, L.P.

COMMENT: Commentor states that the proposed text would apply to all lenders

licensed under the California Finance Lenders Law originating commercial loans and

consumer loans in the state of California. Accordingly, commentor suggests that the

proposed rules should apply only to consumer loans.

RESPONSE: The Department agrees with the commentor’s suggestion and has

revised the rule to exclude commercial loans made or arranged by licensed lenders.

3. COMMENTOR: Letter dated May 24, 2007, from the Honorable Ted Lieu, Chair,

Document PRO 01/07-C-Final

Assembly Committee on Banking and Finance.

COMMENT 1: Commentor states overall support of the proposed regulation to

implement the CSBS and the AARMR Guidance on Nontraditional Mortgage Product

Risks.

RESPONSE: The Department acknowledges and appreciates the support for the

proposed regulations.

COMMENT 2: Commentor recommends the Department further require licensees

to forward copies of complaints and their dispositions to the Department to achieve an

“early warning system.”

RESPONSE: The suggested change is unnecessary and will not be made at this

time. In addition to current examination and complaint systems used to detect patterns and

practices of complaints, the proposed rule provides an additional warning system by

requiring lenders to report resolved and unresolved complaints. The rule also requires

lenders to submit complaint documentation to the Commissioner should it be necessary to

investigate consumer complaints filed with licensees. If the new reporting requirement

demonstrates the need to create additional warning systems, the Department will revisit

this area in the future, as necessary.

COMMENT 3: Commentor recommends that the Department add an advertising

disclosure to state what types of products can result in negative amortization, and to guard

against advertisement in small type or print.

RESPONSE: The suggested changes are unnecessary and will not be made at this

time. Rather than disclosing whether products can result in negative amortization, the

proposed disclosure provides meaningful information to understand the impacts of

negative amortization. See for example, paragraphs (1)(K) and (L) of subsection (e) of

Sections 1436 and 1950.314.8. Additional disclosures concerning a balloon payment and

a prepayment penalty are also required by the rule. Moreover, the proposed rule requires

an equally prominent disclosure, to help guard against inconspicuous statements in

advertisements. Finally, it is noteworthy that the rule sets forth examples of false,

misleading, or deceptive advertising practices. This list is not exhaustive. Therefore, the

Department retains its authority to prevent violations of current statute while prohibiting

false advertising, generally.

COMMENT 4: Commentor recommends that the Department expand the

Comparison of Sample Mortgage Features form to include option ARMs that begin with an

initial fixed teaser rate.

RESPONSE: The Department agrees with the commentor’s suggestion and has

revised the disclosure form to add another column (consistent with the Department of Real

Estate or “DRE” form) that enables lenders to provide additional disclosures for other types

of loans that may be proposed for the borrowers. It is also noteworthy that column 3 of the

proposed form also includes disclosures to address option ARMs.

Document PRO 01/07-C-Final

COMMENT 5: Commentor states that the Comparison of Sample Mortgage

Features form should be available in multiple languages.

RESPONSE: The Department agrees and will coordinate with DRE to make its

form available in other languages consistent with DRE’s current practice, so lenders can

utilize the forms for the purpose of avoiding any challenges based on misunderstandings.

The Department understands a related issue is also being considered in the Legislature.

See, for example, Assembly Bill 512 (Lieber), a bill that is supported and opposed by

various stakeholders. The Department remains committed to working with interested

parties to consider this issue in the future, and to determine whether an appropriate

solution can be provided by statute or rule. In the meantime, the Department will continue

to investigate any complaints involving mortgage loans negotiated in languages other than

the borrowers’ primary language, and will continue to bring enforcement actions as

necessary to prohibit misleading or deceptive statements and practices.

4. COMMENTOR: E-mail dated May 31, 2007, from Coleman Gregory with PB

Capital Corporation.

COMMENT: Commentor states that the proposed rulemaking, as drafted, would

apply generally to all finance companies, regardless of the nature of their respective

businesses. Commentor suggests modifying the rulemaking to apply specifically and only

to those finance lenders and mortgage lenders that make nontraditional mortgage

products.

RESPONSE: The Department agrees with the commentor’s suggestion to tailor the

rule to various loans that are covered by its provisions. Accordingly, appropriate changes

have been made to help address the comments.

5. COMMENTOR: Letter dated June 1, 2007, from Stephen P. Renock, IV with

OCTFCU Mortgage Co., LLC.

COMMENT 1: Commentor indicates the Comparison of Sample Mortgage

Features disclosure form is cumbersome and confusing, and suggests limiting the form to

1 or 2 comparisons.

RESPONSE: The Department disagrees with the commentor’s suggestion and will

not make the suggested changes. The proposed disclosure form (developed in

coordination with the DRE) is designed to prevent misunderstandings, by providing

meaningful information concerning loan products. Limiting the form to one or two product

types would decrease the level of disclosure and thereby reduce consumer protection.

COMMENT 2: Commentor recommends excluding the gross income and the

projected payment difference from the form, for the 6

year.

RESPONSE: The Department disagrees with the commentor’s suggestion and will

not make the suggested changes. Excluding the gross income and projected payment

differences from the form would reduce the level of disclosure concerning the upcoming

maximum loan payment. As proposed, the rule helps guard against payment shock

Document PRO 01/07-C-Final

associated with certain loans with deferred payment options.

COMMENT 3: Commentor suggests amending the 3-day disclosure so that the

disclosure is offered after the borrower’s income has been verified, perhaps with final

documents but no later than 3-days prior to loan funding.

RESPONSE: The Department disagrees with the commentor’s suggestion; thus,

the suggested change will not be made. The rule (patterned after long-standing disclosure

laws applicable to mortgage brokers under the Real Estate Law) provides pertinent

disclosures as early as possible, prior to the borrower’s commitment. Lenders are able to

obtain the borrower’s verification of income during the loan application process, and

provide a good faith estimate based on information received from the borrower.

COMMENT 4: Commentor states that the advertising items are too numerous, and

recommends that advertising should direct borrowers to a website, a phone number or a

mailing address for more detailed information.

RESPONSE: The Department disagrees with the commentor. Accordingly, the

suggested change will not be made. The Department believes the advertising

requirements (developed with DRE) provide necessary information to assist consumers in

the product selection process, in addition to curbing fraudulent or deceptive advertising.

Steering prospective borrowers to other means of communication would not ensure that

consumers receive the requisite disclosures in a timely manner.

6. COMMENTOR: Facsimile and by mail, letter dated June 19, 2007, from John T.

Gaiser with Quality Home Loans.

COMMENT 1: Commentor states that providing the information in the “Comparison

of Sample Mortgage Features: Typical Mortgage Transaction” model form may prove

detrimental if borrowers receive information about loan products that are not offered by the

lender.

RESPONSE: Subsection (d) of the proposed rule makes it clear that the

disclosures apply to “loan products offered by” the lender. Nevertheless, the Department

will revise the form to confirm that lenders may add or delete columns to conform to loans

offered by the lender. The form will also be revised to clarify and confirm the lender’s

obligation to disclose information on a separate column concerning the loan product

proposed for the borrower.

COMMENT 2: Commentor indicates the payment scenarios and product

information contained in the model form are confusing and could be difficult to explain.

RESPONSE: The Department disagrees with the commenter; therefore, no change

will be made to the form, in response to this comment. The model form (patterned after the

form prescribed by the DRE) helps provide full disclosure of material information to

borrowers, so they can be better informed when making a product choice. To help lenders

understand the information disclosed in the model form, the Department will make

available an instructional guide. This instructional guide will be consistent with instructions

Document PRO 01/07-C-Final

provided by the DRE to licensed real estate brokers arranging loans.

COMMENT 3: Commentor states that lenders should be able to modify the model

form to reflect only loan products offered by the lenders.

RESPONSE: As indicated in its response to Comment 1, above, the Department

will adjust the form to confirm that a lender must disclose information on loans offered by

the lender, and may add or delete columns to reflect loan products offered by the lenders.

More importantly, the Department has amended the Rule to allow lenders to use their own

forms, as specified.

COMMENT 4: Commentor states that the model form should be revised to

resemble Illustrations promulgated by federal agencies, as specified.

RESPONSE: The Department disagrees with the comment and no change will be

made. The model form is more effective than the federal illustrations. For example, the

model form contains information that specifically relates to the borrower’s transaction;

whereas, the federal rule cited by the commentor provides only hypothetical explanations.

Moreover, the model form helps achieve uniform and consistent disclosures in the

marketplace, since it is patterned after the form developed by DRE for mortgage loan

brokers. In addition, the federal agencies are seeking to incorporate the suggested

illustrations into Regulation Z in the future; thus, it is unnecessary to duplicate the federal

disclosures, and nothing prohibits lenders from including them in their disclosures to

borrowers to carry out the objectives of the Guidance.

COMMENT 5: Commentor suggests revising the model form to clarify that

information is based on sample information rather than borrower–specific information.

RESPONSE: The Department disagrees with the comment and suggestion, and

will not make the requested change. The model form is designed to provide borrower-

specific information so consumers can make informed product choices, and understand the

risks and rewards of loan products offered by the lender.

COMMENT 6: Commentor indicates that specific loan terms, such as the

borrower’s interest rate, may not be available or determined within 3 days of application.

RESPONSE: The Department disagrees with the comment; therefore, no change

will be made. The 3-day timeframe is based on longstanding provisions of law applicable

to mortgage brokers under the Real Estate Law. Lenders are able to estimate the interest

rate based on a review of the loan application, and can determine other loan information by

obtaining the borrower’s verification. The model form demonstrates that the disclosure is

an estimate and directs the borrower to carefully review all loan documents to confirm the

actual amount, rate, and provisions of the loan.

COMMENT 7: Commenter suggests that lenders should not be required to provide

the model form if a real estate broker provides the Form RE 885 when arranging the

lender’s loan.

Document PRO 01/07-C-Final

RESPONSE: The Department has clarified that the Form RE 885 satisfies the rule

when provided by a real estate broker, to address this comment.

COMMENT 8: Commentor suggests that lenders should not be required to confirm

the accuracy of information contained in the Form RE 885.

RESPONSE: The Department disagrees with the comment. The Guidance is

intended to ensure adequate supervision and due diligence by lenders. The comment

would not further the purpose of the Guidance.

Document PRO 01/07-C-Final

7. COMMENTOR: Facsimile and by mail, letter dated June 25, 2007, from D.

Steven Blake with Downey Brand Attorneys LLP provides two comments with a detailed

memo and attachment to help illustrate the two comments.

COMMENT 1: Commentor states that the proposed regulation may be construed to

apply to non-consumer lenders. Commentor suggests amending the proposed regulation

to apply only to loans made primarily for personal, familial, or household interests.

RESPONSE: The Department has addressed the commentor’s concerns by

narrowing the rule’s application to consumer loans, as suggested.

COMMENT 2: Commentor further states that the incorporation by reference of the

CSBS and AARMR Guidance appears to be improper under the OAL regulation.

Commentor suggests that the proposed regulation integrate the pertinent portions of the

Guidance into the text.

RESPONSE: The Department disagrees with the commentor; thus, it will not seek

to codify the Guidance into the rule. To do so would be unduly burdensome to lenders by

taking away their flexibility to adopt best practices that may provide greater protection to

consumers. Thus, the Department believes it is unnecessary to take away the lender’s

ability to adjust its best practices to meet changed circumstances in the marketplace.

8. COMMENTOR: E-mail letter dated June 26, 2007 from David C. Knight on

behalf of the California Financial Services Association.

COMMENT 1: Commentor states that the proposed regulations deviate from the

CSBS/AARMR adopted guidance by expanding the concept of nontraditional mortgage.

Commentor recommends amending the regulation to conform with the CSBS/AARMR

guidance.

RESPONSE: The Department disagrees with the commenter. No further

clarification is needed at this time because the rule refers to nontraditional mortgage

product “as defined” by the Guidance. The model form under subsection (d) includes a

comparison of various loan products (traditional and nontraditional) including ARMS, to

provide a comparison for borrowers. Although the Nontraditional Mortgage Loan Survey

requires lenders to report its home equity lines of credit (HELOCs) and covered loans, this

report codifies an existing report sent to lenders in 2007. Given the interest expressed by

the Legislature and others in reviewing this loan product information, and to help monitor

the risk of loan portfolios, the Department believes it is worthwhile to retain these reporting

categories, at this time.

COMMENT 2: According to the commentor, the Department indicated that the

rulemaking is needed to provide flexibility to licensees to help carry out the stated

objectives of the Guidance. However, California is adding products and layers of

requirements that were not contemplated in the CSBS/AARMR guidance.

RESPONSE: The Department disagrees with the comment. The rule is consistent

with the Guidance that requires lenders to adopt best practices (e.g., lawful processes,

Document PRO 01/07-C-Final

policies and procedures) to address risks associated with certain loan products. By placing

the obligation in the rule, this proposed action ensures continuous implementation of the

Guidance by lenders.

COMMENT 3: Commentor points out that the CSBS/AARMR guidance encourages

mortgage lenders to adopt robust risk management practices that address product

attributes, production, sales and securitization practices. The risk management practices

should include enhanced performance measures and management reporting that provides

early warning for increased risk. As proposed, the requirement to continuously implement

best practices is ambiguous and likely impossible to comply with. It is recommended that

the regulation state that any required policies, once implemented by the licensee, must be

maintained.

RESPONSE: The Department disagrees with the comment; thus, no change will be

made. The rule is intended to require continuous implementation to ensure licensees are

following (not merely maintaining) these best practices on an ongoing basis. Nevertheless,

to address the concerns of ambiguity, the Department has provided a definition of “best

practices.”

COMMENT 4: Commentor states that the annual report form seems to be a form

that would be used by an examiner while conducting a branch visit, rather than a report

that should be required to be filed annually by a licensee. The annual report form is

ambiguous because it includes traditional and nontraditional mortgage products.

RESPONSE: The Department has provided definitions for the loan survey, to help

address this comment. The definitions will help clarify “simultaneous second lien loan, “

consistent with the Guidance. Although the survey requires reporting of HELOCs and

covered loans, the Department believes the information is useful in determining the scope

of risk.

COMMENT 5: Commentor states that the disclosure form to be given to customers

is confusing, and many lenders do not offer the nontraditional mortgage products. Also,

licensees often do not have the information available to complete this form within the

proposed three-day window. Commentor suggests that the regulations be amended to

streamline mortgage disclosure so that they are more meaningful to the consumer.

RESPONSE: The Department disagrees with the comments. The model form

provides more meaningful disclosures, based on specific information provided by

borrowers. The disclosure is an estimate provided to borrowers, as indicated by the

precautionary note to borrowers on the model form. Only one disclosure form is expressly

required by a date specified in the rule, although lenders still must comply with laws that

are designed to guard against misleading statements. The Department has revised the

model form to allow lenders to add or delete columns to reflect loan products offered by the

lenders.

COMMENT 6: Commentor states that the advertising disclosure in the proposed

regulations is not consistent with, and goes beyond, the scope of the Guidance.

Document PRO 01/07-C-Final

Commentor recommends amending the regulations so they are consistent with the

CSBS/AARMR Guidance.

RESPONSE: The Department disagrees with the comment. The advertising

requirements are based on DRE’s proposed rules. The DRE developed its disclosure rule

based on the principles of the Guidance. Although the advertising requirements apply to

adjustable rate mortgages, the rule helps carry out the objective of the new Statement on

Subprime Mortgage Lending. The items of disclosure will provide greater consumer

protection by helping to avoid fraudulent statements and to prevent misunderstandings.

Additional changes have been made to clarify the rule’s application to loan products

subject to the Guidance.

9. COMMENTOR: Facsimile dated June 25, 2007, from Gabe del Rio with

Community Housing Works.

COMMENT 1: Commentor recommends that the Department should adopt the

recent Statement on Subprime Lending as published by AARMR and CSBS on July 17,

2007.

RESPONSE: As suggested by commentor, the Department has revised the rule to

incorporate the Statement on Subprime Lending as published by AARMR and CSBS on

July 17, 2007.

COMMENT 2: Commentor states that complaint data should be made available to

the public, and that the rule should define the resolved and unresolved complaints.

RESPONSE: The Department disagrees that consumer complaints can be made

available to the public. In accordance with current law governing privacy and

confidentiality, the Department cannot disclose complaint information. Thus, this change

will not be made. The terms resolved and unresolved are known to lenders as part of their

complaint systems, so further clarification is unnecessary at this time.

COMMENT 3: Commentor states that the Department should ensure adequate

broker oversight, promote consumer education and understanding, and support borrowers

in distress.

RESPONSE: No further changes are needed to require proper oversight over

brokers, because the Guidance requires lenders to exercise such oversight. Moreover, the

Department will require information covering education of agents as well as employees.

Rather than advising borrowers on the disclosure form to seek assistance from a HUD

certified home loan counseling agency, the Department will continue to provide information

on counseling and other services available to borrowers through its education efforts,

including information on its web page and through local outreach. Finally, the Department

remains committed to working with interested parties to help borrowers in distress, and in

coordination with federal and state regulators.

10. COMMENTOR: Facsimile dated June 27, 2007, from S. Guy Puccio and Dan

Garrett with Wallace, Puccio & Garrett.

Document PRO 01/07-C-Final

COMMENT: Commentors recommend amending the proposed regulations to

clarify that Sections 1436 and 1950.314.8 apply only to loan transactions where the

intended security properties are dwellings consisting of one to four residential units.

RESPONSE: The Department has revised the rule to apply to loans secured by

residential real property, as suggested by the commentors.

11. COMMENTOR: Letter dated June 29, 2007, from Susan DeMars with the

California Mortgage Bankers Association.

COMMENT 1: Commentor states that CSBS/AARMR intended that its model

Guidance be adopted by state in whole and without variance to create a level playing field.

Commentor questions why the Department is proposing to move away from the Guidance

and tread its own path.

RESPONSE: The Department disagrees with the comments. The proposed

rulemaking carries out the Guidance by ensuring continuous and uniform compliance by

licensed lenders. The proposed rules help achieve stated goals of the Guidance including

consumer protection.

COMMENT 2: Commentor has serious concerns over the unintended adverse

consequences from the proposed rules; and recommends the Department, the Department

of Real Estate and the Department of Financial Institutions adopt the CSBS/AARMR

Guidance in whole.

RESPONSE: The Department disagrees with the comments because the proposed

rulemaking will have a potential benefit on impacted businesses, the marketplace, and the

public, by helping avoid risks of loss associated with loans secured by residential real

property. See the Department’s Economic Impact Statement for further information in this

regard. Each state agency (e.g., DOC, DRE and DFI) is adopting the Guidance in a

manner that achieves equal and uniform regulation for its respective licensees.

COMMENT 3: Commentor states the proposed rules do not provide either clear

definition or intent on the part of the Department to define the scope of coverage. It is

recommended that a clear definition of what is, and what is not, a “Non-Traditional

Mortgage” be added to the rules.

RESPONSE: The Department disagrees with the comment and believes an

additional definition of nontraditional mortgage product is unnecessary at this time. As

indicated by subsection (b) of the proposed rule, a nontraditional loan product has the

same meaning “as defined” by the Guidance. Page 3 of the commentor’s letter

acknowledges this definition. However, a similar reference to define nontraditional

mortgage product will be made to other provisions for purposes of clarity.

COMMENT 4: Commentor states that the “Nontraditional Mortgage Loan Survey”

asks lenders to capture on this form dollar volume of “other” loans that does not conform to

the definitions in categories (a) through (d). Commentor recommends defining

Document PRO 01/07-C-Final

nontraditional mortgage products to avoid the “Other” category. Commentor further

suggests that items (c) and (d) on the survey be moved into the position of subcategories

under items (a) and (b) signifying that reduced documentation loans and simultaneous

second lien loans are not nontraditional mortgage loans but, rather, additional risk factors

of nontraditional mortgage loans.

RESPONSE: The Department agrees that the “other” category lacks clarity and has

revised that category on the survey form to reflect ARMs covered by the new Statement on

Subprime Lending. However, the other categories will be maintained to provide sufficient

information about the portfolio of risk maintained by each licensed lender, and to provide

information to public-policy makers and others.

COMMENT 5: Commentor recommends that the Department amend the books

and records provisions relating to consumer complaints to provide time periods specified

by the California Finance Lenders Law and the California Residential Mortgage Lending

Act.

RESPONSE: The Department disagrees with the comment as it is unnecessary to

duplicate the current record-keeping requirements under the law.

COMMENT 6: Commentor states that the disclosure form is too extensive, too

complicated, and too late in the loan process, as specified. Commentor recommends that

the Department adopt forms and tools recently published by the federal banking agencies

in 2007.

RESPONSE: The Department disagrees with the comments and will not delete the

loan disclosure. Although commentor indicates that term “completed” application is

undefined, the Department believes the term is readily understood in the industry. The

proposed loan disclosures provide more meaningful information because they are based

on information provided by the borrowers (rather than mere “illustrations” as proposed in

the federal agency guidance). The borrower’s specific information (verified by the borrower

through the loan application process) provides important information that helps avoid the

payment shock experienced in the 6

year of certain loans. Because commentor

acknowledges the federal disclosures will be incorporated as part of Regulation Z, licensed

lenders may already be required to comply with these disclosures. Thus, the proposed

disclosures will complement the ongoing efforts at the federal level.

COMMENT 7: Commentor states that the advertising rules encompass all variable

rate mortgage products, and are overly specific for solicitation of nontraditional mortgage

characteristics. Commentor recommends that the Department defer to the Federal

Reserve Board efforts to formulate new Truth In Lending Act/Regulation Z advertising and

promotion requirements for lenders in the nontraditional mortgage product area.

RESPONSE: The Department disagrees with the comment and will not delete the

proposed advertising requirements. The proposed requirements (developed in

consultation with DRE) provide meaningful disclosures so borrowers can make informed

decisions early in the loan solicitation process. The rule provides specific information to

help prevent misunderstandings by borrowers. Nevertheless, subsection (e) has been

Document PRO 01/07-C-Final

revised to apply to loan products subject to the Guidance.

12. COMMENTOR: Letter dated June 29, 2007, from Mary Jane M. Seebach with

Countrywide.

COMMENT 1: Commentor states that the Department should adopt the CSBS and

AARMR Guidance, and not promulgate a new regulation.

RESPONSE: The Department disagrees with the comment and will not abandon

the proposed regulation. Consistent with the actions of other jurisdictions, the Department

is ensuring ongoing compliance with the Guidance. The regulation ensures that lenders

achieve the objectives of the Guidance on an ongoing basis through various requirements

including the adoption of best practices. The responsibility for implementing the Guidance

should be borne by licensed lenders, with oversight from regulatory agencies.

COMMENT 2: In general, Commentor states that several provisions of the

proposed rule are vague and overbroad in attempting to reach products that are not

defined as “nontraditional mortgages.”

Specific examples in the comments, and responses, are as follows:

(i) Subsection (a) includes an unspecified reference to “including but not limited to.”

(ii) Subsection (d) includes undefined terms such as “completed” application,

“person unfamiliar with mortgage loan terms and conditions,” “material

information,” “payment scenarios” and “loan scenarios.”

(iii) Subsection (d) makes a distinction between the DOC’s “minimum” form and

DRE’s form that “satisfies.”

(iv) Subsection (e) is unclear as to whether it applies only to “representations of an

installment in repayment” in advertising.

(v) Subsection (e) should not cover all adjustable rate loans.

(vi) Subsection (e) contains redundant information.

(vii) Subsection (e) fails to define equally prominent disclosure.

(viii) Subsection (b) should not require reporting of reduced documentation, HELOCs,

covered loans, or “other” loans.

(ix) Subsection (d) should not include disclosure of 5/1 ARM loans.

RESPONSE:

(i) The Department agrees with the comment and will delete the reference to

“including but not limited to.” Instead, further clarification will be provided by

referencing the additional guidance provided by the Statement on Subprime

Loans issued by AARMR and CSBS on July 17, 2007.

(ii) The Department disagrees with the comment regarding “completed” application,

as this is a term that is readily understood by the industry through the application

process. Additionally, the Department will adjust subsection (b) to eliminate

terms that lack clarity, as suggested by the commentor (e.g. person unfamiliar

with loan terms). Moreover, the Department will clarify that the disclosures form

satisfies the requirements of the subsection to address remaining concerns

Document PRO 01/07-C-Final

(e.g., “material” and “scenario”.)

(iii) The Department agrees with the comment and will make changes to address

commentor’s concerns.

(iv) The Department disagrees with the comment because the rule expressly applies

to advertisements by its own terms.

(v) The Department disagrees with the comment because the rule is needed to help

prevent payment shock associated with uninformed borrowers. However, the

rule has been modified to apply to loans that are subject to the Guidance.

(vi) The Department disagrees. The information disclosed in subsection (d)

provides a comparison of loan product information; whereas, subsection (e)

prevents misrepresentation regarding certain loan products. Each subsection

serves a different purpose; therefore, the disclosures are appropriate.

(vii) The phase “equally prominent” needs no further clarification. This provision is

patterned after the DRE’s proposed regulation to achieve greater uniformity

among loan brokers and lenders.

(viii) The Department disagrees with the comments because the additional

information (reduced documentation, HELOCs and covered loans) is needed

to provide an overview of the risks incurred by each lender. The Department

will delete “other” from the survey form to address the clarity concerns.

(ix) The Department disagrees. Subsection (d) is intended to provide a

comparison of loan products to help ensure that borrowers are aware of the

risks and rewards of each, and to avoid the “payment shock” associated with

certain loans.

COMMENT 3: Commentor recommends that the Department allocate its

examination and enforcement resources to avoid duplicating examinations and to promote

a level playing field across California lenders.

RESPONSE: The Department acknowledges this comment but it does not relate to

the content of the rule. Nevertheless, it will take into consideration the suggestions to

coordinate examinations and regulatory efforts with other agencies.

COMMENT 4: Commentor recommends that the Department not adopt the

proposed rules. The Department should issue the CSBS and AARMR Guidance as the

Department’s guidance.

RESPONSE. The Department disagrees with the comment and will not abandon

the rule. Besides the reasons given in the responses to other comments, above, the

necessity of the rule is described in more detail in the Initial Statement of Reasons.

13. COMMENTOR: Facsimile dated July 2, 2007, from Kristin M. DeMaria with

Terry M. Mallery.

COMMENT 1: Commentor states that implementation of a risk management plan

would be an excessive cost to a small CFL licensee, who may rarely make a CFL loan, yet

would be required to follow the proposed stringent risk management practices. The

increased costs to small CFL brokers is not nominal, but will be significant and an

unreasonable cost burden to their businesses.

Document PRO 01/07-C-Final

RESPONSE: The Department acknowledges the comment regarding compliance

costs. By definition, licensees are not small businesses, and the Department believes any

compliance costs will be offset by potential benefits to licensees that are not identified by

the comments. For a more detailed description of the benefits to licensees, please refer to

the Economic Impact Statement.

COMMENT 2: Commentor states that the annual reporting on arrangement and

number of nontraditional mortgage products, the manner of implementing risk

management and internal controls, and the reporting of consumer complaints, is

burdensome and would be costly to the small broker and would essentially put them out of

business.

RESPONSE: The Department acknowledges the comment regarding compliance

costs, and refers to its response in number 1 above, for a description of potential benefits

to licensees.

COMMENT 3: Commentor states that the disclosures comparing loan scenarios

duplicates regulations already imposed on brokers. The existing disclosures are clear,

conspicuous, and understandable by the general public, making the proposed disclosure

unnecessary and burdensome. See California Financial Code Section 22332.

RESPONSE: The Department disagrees with the comment because the rule does

not duplicate current statutory requirements. Rather, the rule carries out and implements

existing statutes that are designed to ensure appropriate loan disclosures.

COMMENT 4: Commentor states that the prohibition of certain false, misleading

and deceptive advertising is an unreasonable burden by restricting advertising far too much

and duplicating already existing laws. See California Financial Code Sections 22161,

22163 and 22164.

RESPONSE: The Department disagrees with the comment because the rule does

not duplicate current statutory requirements. Rather, the rule carries out and implements

existing statutes that are designed to prevent false and misleading advertising.

14. COMMENTOR: Letter dated July 2, 2007, from Lynnea J. Olsen with Citi.

COMMENT 1: Commentor recommends that the Department clarify the definition

of “nontraditional mortgage products” as used in the proposed rules to be uniform

throughout the rules and consistent with the definition adopted by CSBS and AARMR in

their November 14, 2006 Guidance.

RESPONSE: The Department disagrees with the proposed suggestion because

the rule already refers to nontraditional mortgage product “as defined” by the Guidance.

Nevertheless, conforming changes will be made to other provisions to confirm the definition

provided by the Guidance, and thereby apply to loans that are subject to the Guidance.

Document PRO 01/07-C-Final

COMMENT 2: Commentor recommends limiting the advertising prohibitions to

nontraditional mortgage products.

RESPONSE: The Department disagrees with the commentor’s suggestion. The

advertising prohibitions are intended to cover adjustable rate mortgages as well. By doing

so, the rule helps achieve the goals of the new Statement on Subprime Mortgage Lending

that has now been incorporated by reference into the rule. Thus, the rule has been

clarified to cover loans that are subject to the Guidance.

COMMENT 3: Commentor recommends revising the “Nontraditional Mortgage

Loan Survey and The Comparison of Sample Mortgage Features: Typical Mortgage

Transaction” form to clarify that it is consistent with the CSBS/AARMR Guidance.

RESPONSE: The Department disagrees with the suggestion because the survey

and disclosure form are intended to incorporate other types of adjustable and high-risk

loans designated in these documents, as specified. This information is necessary to

provide appropriate disclosure to both borrowers and the Department.

15. COMMENTOR: Letter and facsimile dated July 2, 2007, from Paul Leonard

with Center for Responsible Lending.

COMMENT 1: Commentor recommends that the Department broaden the

proposed regulations to adopt the CSBS/AARMR Statement on Subprime Lending for

State-licensed entities.

RESPONSE: The Department agrees with the suggestion and has revised the

proposed rule to incorporate the Statement on Subprime Lending as published by

AARMR/CSBS on July 17, 2007.

COMMENT 2: Commentor recommends that the Department expand the section

on risk management requirements to include appropriate consumer protections.

RESPONSE: The Department disagrees with the suggested revisions because it is

unnecessary. The Guidance already requires compliance with additional consumer

protections, and the proposed rules address consumer protection through enhanced

disclosure and prohibitions on false advertising.

COMMENT 3: Commentor states that the nontraditional mortgage products

comparison chart should be amended to make it consistent with the sample comparison

charts by the federal bank, thrift, and credit union regulatory agencies, and should include

hybrid ARM products and foreign language translations.

RESPONSE: The Department disagrees with the suggestion of incorporating

federal disclosures, because the proposed disclosure form in the rule (developed in

coordination with DRE) provides a comparison of products based on the borrower’s

transaction, rather than mere illustrations as provided under the federal guidance. The

Department’s proposed rule also helps ensure uniform disclosures by lenders and brokers

regulated by DOC and DRE. While no additional changes are made at this time, the

Document PRO 01/07-C-Final

Department will continue to monitor the effectiveness of the proposed disclosures through

its regulatory processes, and can make necessary adjustments in the future as necessary

and appropriate. It is also noteworthy that the federal disclosures may be incorporated as

part of Regulation Z, so licensed lenders may be required to comply with them under

federal disclosure laws. Nevertheless, the Department will work with DRE to provide forms

in foreign languages (as is the current practice of DRE), and to add an additional column to

the form to provide disclosure of loan product proposed for the borrower such as a hybrid

ARM.

COMMENT 4: Commentor recommends that the Department include a statement

that failure to follow the Guidance will be deemed a violation of the California Finance

Lenders Law and/or the California Residential Mortgage Lending Act, and will result in

disciplinary action and other enforcement measures by the Department.

RESPONSE: The Commentor’s suggestion is unnecessary because violation of a

rule is already a violation of law under the California Finance Lenders Law and the

California Residential Mortgage Lending Act. The Guidance addresses enforcement by

regulators, as well.

16. COMMENTOR: E-mail dated July 2, 2007, from Anne C. Canfield with

Consumer Mortgage Coalition.

COMMENT 1: On the “scope” of the rules, commentor suggests: (1) defining

“nontraditional mortgage product” consistent with the Guidance, (2) providing that lenders

are not liable for engaging in a practice not specifically listed in the Guidance, and (3)

adopting the Guidance as informal guidelines rather than binding regulations.

RESPONSE: The Department disagrees with the suggestions, for the following

reasons. First, the rule already refers to nontraditional mortgage products “as defined” by

the Guidance, so no further definition is needed. (However, technical amendments will be

made to confirm the definition.) Second, it would be inappropriate to exclude a lender from

liability, and such a suggestion may conflict with existing laws that are designed to prevent

deceptive or unlawful practices. Third, it is necessary to incorporate the Guidance, by rule,

to help ensure ongoing compliance by lenders.

COMMENT 2: As to the advertising requirements, commentor states they are too

extensive, as specified, and urges the Department not to adopt the regulation at this time.

RESPONSE: The Department disagrees with the commentor. As further explained

by the Initial Statement of Reasons, the advertising requirements (as developed with DRE)

will provide sufficient information to consumers to help prevent misunderstandings. The

rule also helps prevent payment shock that can result from insufficient information in

advertisements. The advertising prohibitions help carry out the consumer protection

objectives of the Guidance, as well.

COMMENT 3: Regarding the disclosures, commentor questions whether the

greater level of detail will be helpful to consumers, and recommends the federal disclosure

form.

Document PRO 01/07-C-Final

RESPONSE: The Department disagrees with the commentor and will retain the

current disclosures because they provide information based on products offered to the

borrower, rather than merely illustrations as outlined in the federal guidance. Therefore,

the state disclosures will provide more meaningful disclosures, and will help ensure

consistency with disclosures used by brokers regulated by DRE. Nevertheless, the

Department will continue to work with AARMR and CSBS to determine if additional

disclosures are necessary and appropriate, in the future.

17. COMMENTOR: Letter and E-mail dated July 2, 2007, from Jim Gazdecki with

Option One Mortgage Corporation.

COMMENT 1: Commentor states that clarification is needed on the Comparison of

Sample Mortgage Features: Typical Mortgage Transaction form. Specifically, commentor

recommends amending the form to clarify that the minimum comparison applies to loan

products currently offered by the lender. Moreover, commentor suggests revising the form

to provide that it is based on a hypothetical borrower, and the loan amounts and other

information are not based on the consumer’s application.

RESPONSE: The Department agrees with the suggestions, in part. Specifically,

the Department will revise the disclosure form to allow lenders to add or delete columns to

reflect loan products offered by the lender. However, the Department disagrees with the

proposed disclosure language because the disclosure form is tailored to the borrower’s

circumstances (rather than a mere hypothetical). The form already includes a sufficient

disclosures to avoid misunderstandings with borrowers, as specified.

COMMENT 2: Commentor notes that the proposed survey form may result in

double-counting of some loans because a given loan may have more than one of the

features identified in 4 (a) through (g).

RESPONSE: The Department recognizes the comment and understands that

some loans may fall into two reporting categories. The Department also acknowledges

that the commentor does not view the potential double counting as a problem. Thus,

clarification is neither suggested nor needed at this time.

18. COMMENTOR: E-mail dated July 2, 2007, from Danielle Fagre Arlowe with

American Financial Services Association.

COMMENT 1: Commentor states that the proposed regulations should not apply to

traditional ARM products.

RESPONSE: The Department disagrees with the comment and suggestion. The

proposed rule is intended to provide meaningful information to consumers and regulators,

including ARM loans. Moreover, the Department is incorporating the Statement on

Subprime Mortgage Lending, to help ensure adequate consumer protection with respect to

ARM loan products. The rules will reflect loan products subject to the Guidance.

COMMENT 2: Commentor suggests that the Department amend the proposed

Document PRO 01/07-C-Final

regulation to provide more flexibility to mortgage lenders with respect to the assessment of

a borrower’s repayment capacity.

Document PRO 01/07-C-Final

RESPONSE: The Department disagrees with the suggestion because it is

unnecessary. The Guidance requires risk management practices and other controls that

enable lenders to evaluate the borrower’s ability to repay loans.

19. COMMENTOR: Letter dated July 2, 2007, from George Eckert with California

Mortgage Association.

COMMENT 1: Commentor recommends that the proposed regulations be

amended to contain a definition relating to the scope of the Guidance that is identical to the

definition contained in SB 385 (Machado – 2007).

RESPONSE: The Department disagrees with the suggestion because it is

unnecessary. The proposed rule already refers to nontraditional mortgage product “as

defined” by the Guidance. Commentor acknowledges the Guidance provides a sufficient

definition, and no further definition is needed. Recent state legislation (SB 385 - 2007) also

includes a definition of nontraditional guidance that reiterates the Guidance; thus, retaining

the definition in the Guidance is also consistent with State law.

COMMENT 2: Commentor states that it is not clear exactly what is meant by

“appropriate” and “best” risk-management practices. Commentor recommends that the

proposed regulations be amended to make it clear to licensees that they are required to

comply with the Guidance.

RESPONSE: The Department agrees with the comment and will incorporate

changes, by defining the reference to “best” practices. Moreover the term “appropriate” will

be revised to “lawful” to help clarify that the best practices are not appropriate if they violate

law.

COMMENT 3: Commentor notes that, as proposed, the Department’s requirements

in the written compliance report exceed what is contained in the Guidance.

RESPONSE. The Department will not incorporate changes to address this

comment, because the provisions are needed to monitor a lender’s compliance with the

rule.

COMMENT 4: Commentor states that the requirement for licensees to retain copies

of consumer complaints, and how the licensee resolved each complaint, is inappropriate.

RESPONSE: The Department disagrees with the comment and will not make the

requested change. Access to consumer complaint information, as specified, helps ensure

compliance by lenders, and to detect unlawful practices.

COMMENT 5: Commentor states that, as proposed, the comparison of loan

scenarios is vague and will not adequately advise licensees of their responsibilities.

RESPONSE: The Department disagrees with the comments. But it will make

appropriate revisions to the disclosure form tailored to loans offered by the lender and to

allow the lender to use its own form under specified conditions.

Document PRO 01/07-C-Final

COMMENT 6: Commentor states that, as proposed, the advertisement

requirements amounts to a de facto ban on advertising installment amounts.

RESPONSE: The Department disagrees with the comment and believes the

advertising requirements (as developed with DRE) provide consumer protection, and

disclosures that are meaningful and forthright for prospective borrowers.

COMMENT 7: Commentor recommends that the Nontraditional Mortgage Loan

Survey should conform to the products defined to be within the scope of the Guidance, as

described in SB 385.

RESPONSE: The Department disagrees with the comment because the survey is

intended to include other types of high-risk loans. The survey will enable the Department

to monitor the extent of risks associated with each lender’s portfolio.

COMMENT 8: Commentor states that the Comparison of Sample Mortgage

Features is inappropriate and potentially confusing to consumers if it includes products the

lender does not offer.

RESPONSE: The Department agrees with the comment and, as suggested, will

tailor the disclosure form to products offered by the lender. For example, the rule will be

revised to allow lenders to add or delete columns to reflect loan products offered by the

licensee.

20. COMMENTOR: Facsimile and e-mail dated July 2, 2007, from Kevin Stein with

California Reinvestment Coalition.

COMMENT 1: Commentor recommends that the Department should adopt the

recent Statement on Subprime Lending.

RESPONSE: As suggested by commentor, the Department has revised the rule to

incorporate the Statement on Subprime Lending as published by AARMR and CSBS on

July 17, 2007.

COMMENT 2: Commentor states that complaint data should be made available to

the public, and that the rule should define the resolved and unresolved complaints.

RESPONSE: The Department disagrees that consumer complaints can be made

available to the public. In accordance with current law governing privacy and

confidentiality, the Department cannot disclose complaint information.

COMMENT 3: Commentor states that the Department should ensure adequate

broker oversight, promote consumer education and understanding, and support borrowers

in distress.

RESPONSE: No further changes are needed to require proper oversight over

brokers, because the Guidance requires lenders to exercise such oversight. Rather than

Document PRO 01/07-C-Final

advising borrowers on the disclosure form to seek assistance from a HUD certified home

loan counseling agency, the Department will continue to provide information on counseling

and other services available to borrowers through its education efforts such as updated

information on its web page and ongoing education and outreach. Finally, the Department

remains committed to working with interested parties to help borrowers in distress, and will

continue to work with other regulators to accomplish these goals.

21. COMMENTOR: E-mail dated July 2, 2007, from Keith Bishop.

COMMENT 1: Commentor states that the proposed regulations improperly

incorporate the Guidance by reference. Parts I and II of the Guidance is introductory and

background information. Part III of the Guidance is less than 12 pages in length. It

appears that it would not be cumbersome, unduly expensive or otherwise impractical to

publish the document in the CCR.

RESPONSE: The Department disagrees with the comment; therefore, no change

will be made. The Rulemaking is intended to allow flexibility for lenders to adopt best risk

management practices based on the Guidance. Codifying the Guidance would be

burdensome to licensed lenders by taking away their ability to adopt practices that conform

to changed circumstances in the marketplace.

COMMENT 2: Commentor states that proposed Section 1436 is unduly broad and

fails to meet the “necessity” standard. It applies to every finance company regardless of

whether it makes nontraditional mortgage loans. The Guidance relates to nontraditional

mortgage loans and there is no need to apply the Guidance to all lenders.

RESPONSE: The Department acknowledges the comment and has revised the

rule to address commentor’s concerns. As revised, the rule does not apply to commercial

loans. Further clarification has been provided to apply the rule to loan secured by

residential real property, as specified.

COMMENT 3: Commentor states that proposed Sections 1436 and 1950.314.8 fail

to meet the clarity standard regarding best risk-management practices. Best risk-

management practices is not defined in the proposed regulations and can be reasonably

and logically interpreted to have more than one meaning. Commentor also notes that the

phrase is not used in the Guidance.

RESPONSE: The Department agrees with the comment and will provide a

definition of best practices to avoid the clarity concern raised by the comment.

COMMENT 4: Commentor states that proposed Sections 1436 and 1950.314.8 fail

to meet the clarity standard regarding complaints. Unless the term “complaints” is defined,

it may be interpreted to mean a consumer communication is a complaint or an inquiry.

Commentor further states that it is unclear whether the proposed sections apply to written

as well as oral complaints.

RESPONSE: The Department disagrees with the comment because the rule

applies to “any” complaint, and the lender can discern the meaning of a complaint without

Document PRO 01/07-C-Final

further clarification. Thus, no change is needed at this time.

COMMENT 5: Commentor states that proposed Sections 1436 and 1950.314.8

would require licensees to maintain information regarding the number of resolved and

unresolved complaints. The terms “resolved” and “unresolved” can be reasonably and

logically interpreted to have multiple meanings.

RESPONSE: The Department disagrees with the comment because “resolved” and

“unresolved” have meaning that can be readily understood by lenders that resolve

consumer complaints. Therefore, no change is needed.

COMMENT 6: Commentor states that the proposed regulations would impose

significant new policies and procedures, record-keeping, disclosure, advertising and other

requirements and the Department failed to adequately describe the cost impacts on

representative private person or business.

RESPONSE: The Department disagrees with the comment and believes its

Economic Impact Statement adequately addresses all cost impacts associated with the

proposed rulemaking, and explains the benefits to licensees as well. It is noteworthy that a

licensee is not considered a small business for purposes of determining those impacts.

COMMENTS RECEIVED DURING THE FIRST 15-DAY COMMENT PERIOD

The Department received four public comment letters during the first 15-day public

comment period, which ended on September 5, 2007. Those comments are summarized

below, together with the Department’s responses.

1. COMMENTOR: Facsimile and e-mail dated September 5, 2007, from Leland

Chan with the California Bankers Association.

COMMENT 1: Commentor recommends incorporating the Guidance into its

supervisory activities, and withdrawing the regulation.

RESPONSE: This comment raises issues with the original text of regulations; thus,

it is unnecessary to respond to this comment. Nevertheless, the Department provided

ample responses to similar comments received during the 45-day public comment period,

above. Commentor is referred to the preceding information for further information and

justification.

COMMENT 2: Commentor suggests clarifying that the regulation does not extend

beyond what is covered in the Guidance by, as an example, clarifying that it does not apply

to all ARMs.

RESPONSE: To address this clarity concern, the Department has revised the

appropriate provisions of the rule to clarify the application to certain adjustable rate

mortgage (ARMs) covered by the Statement on Subprime Mortgage Lending.

Document PRO 01/07-C-Final

COMMENT 3: Commentor suggests that the Department’s Nontraditional Mortgage

Loan Survey title should reflect only subprime loan activity covered by the Guidance, and

notes that items c, d, and e describe loan types and features that are not necessarily

covered by the Guidance.

RESPONSE: This comment raises issues with the original text of regulations; thus,

it is unnecessary to respond to this comment. Nevertheless, the Department provided

ample responses to similar comments received during the 45-day public comment period,

above. Commentor is referred to the preceding information for further justification. As

explained above, the rules are intended to capture other types of loans.

COMMENT 4: Commentor appreciates the concept of the comparison disclosure

form to satisfy the provisions of the Guidance. Commentor notes operational challenges

posed by the disclosure form:

(i) It is not always clear at the time that an application for a loan is made that the

consumer is seeking a nontraditional or subprime mortgage product. Therefore,

a lender that offers both prime and sub-prime products, traditional and

nontraditional mortgage products, would be compelled to provide the form

disclosure to all borrowers as long as there is a possibility that a nontraditional or

subprime product may be offered.

(ii) The disclosure form as written is likely not appropriate for lenders that do not

offer the types of loans listed. The disclosure form may be partially obsolete as

the loans listed are already becoming unavailable in the market because of

tightening credit policies.

(iii) The disclosure form requires assumptions about loans that are not applicable to

all lenders. Specifically, it requires lenders to disclose the maximum monthly

payment in year 6 assuming a 5% rise in rates. There are lenders with caps that

would not permit that large of a rate increase in year 6.

Commentor recommends that the disclosure form allow lenders more flexibility in

determining the content of the disclosure so that it would be more relevant and useful to

the consumer, and to accommodate a lender’s particular loan products.

Commentor further suggests a transition period for the adoption of any mandatory form

prior to complying.

RESPONSE: In response to the comments, the Department notes the following:

(i) The rule clearly dictates the disclosure upon receiving an application for a loan

covered by the Guidance. Thus, no further revision is necessary.

(ii) To address this concern, the Department has now added a third option allowing

lenders to provide their own form, so long as it meets certain conditions.

(iii) See response to (ii), above, allowing lenders to use their own form.

Finally, the Department has provided necessary and appropriate flexibility for lenders, as

stated above. A transition period is inappropriate and unnecessary since the rules have

been published since May 2007, similar rules for mortgage brokers became effective

Document PRO 01/07-C-Final

during September 2007, and statutory provisions requiring application of the Guidance (SB

385, Chapter 301, Statutes of 2007) become effective on January 1, 2008.

COMMENT 5: Commentor suggests modifying the advertising restrictions in

subsection (e) so they provide for reasonable disclosure. More specifically, commentor

recommends revising “representation” in subsection (e)(1) to provide that this provision

addresses only “advertising.”

RESPONSE: To help address this comment, the Department has revised the rules

to more closely tailor the advertising limitations to the Guidance, to specifically apply the

provisions to advertising, and to require certain disclosures when applicable to the

advertised product.

2. COMMENTOR: Letter dated September 5, 2007, from Melissa L. Richards with

Buchalter Nemer, on behalf of the California Mortgage Bankers Association.

COMMENT 1: Commentor requests the Department to hold a public hearing in

accordance with Government Code Section 11346.8 before any rulemaking regarding

nontraditional mortgage products is made final. Commentor further requests that the

comment period be extended an additional 30-days.

RESPONSE: The Department has complied with the public notice and comment

periods provided by law, and will proceed to adopt the regulations without an extension.

Since the rules have been published since May 2007, and there have been three

opportunities to comment in writing, an extension is unnecessary.

COMMENT 2: Commentor requests the Department to address the comments and

concerns raised in the California Mortgage Bankers Association comment letter dated June

29, 2007, submitted by Susan DeMars. (NOTE: Likewise, Commentor includes the prior

June 29, 2007 comment letter verbatim on pages 3 through 11 of her letter.)

RESPONSE: The comment raises issues with the original text of regulations; thus,

it is unnecessary to respond to this comment. Nevertheless, the Department provided

ample responses to similar comments received during the 45-day public comment period,

above. Commentor is referred to the preceding information in response to its first

comment letter, for further explanations and justification.

COMMENT 3: Commentor has renewed concerns over the rules regarding

advertising and disclosure. As for advertising, Commentor indicates the rule makes no

reference to the Guidance and does not define “advertising.” In addition, the disclosure

provisions do not refer to the Federal Reserve Board’s disclosures for nontraditional

mortgage products and subprime mortgage products.

RESPONSE: The Department has revised subsection (d) to provide lenders with

the flexibility to use their own form, provided it meets certain conditions; and to clarify that

the advertising provisions apply to advertising, as specified. A definition of advertising is

not provided by rule since existing statutes (referenced in the notes to the rule) already

Document PRO 01/07-C-Final

clarify and define advertising. Thus, no further revisions are needed.

COMMENT 4: Commentor recommends that the Department analyze more recent

regulatory developments, listed below, concerning nontraditional mortgage products and

subprime lending prior to moving forward on this regulation. (NOTE: Commentor’s letter

includes a discussion of the various documents in pages 11 through 18 of her letter.)

(i) The Conference of State Bank Supervisors, the American Association of

Residential Mortgage Regulators, and the National Association of Consumer

Credit Administrators joint statement on Subprime Mortgage Lending dated July

17, 2007.

(ii) The federal Interagency Statement on Subprime Mortgage Lending issued June

29, 2007.

(iii) AARMR and CSBS Model Examination Guidelines available on the CSBS

website, www.csbs.org

(iv) Federal Financial Regulators proposed illustrations of consumer information to

support the Statement on Subprime Mortgage Lending on August 14, 2007.

RESPONSE: The Department appreciates the materials and has analyzed them

(as well as other information) in the process of proposing the final regulations, as requested

by the commentor.

3. COMMENTOR: E-mail dated September 5, 2007, from David C. Knight on

behalf of the California Financial Services Association.

COMMENT 1: Commentor recommends deleting Sections 1436(a) and

1950.314.8(a) from the regulations because codifying a generic “best practices” statement

could subject regulated institutions to frivolous litigation and would establish a de facto

standard for all institutions. Best practices, generally, are goals above and beyond legal

requirements.

RESPONSE: This comment raises issues with the original text of regulations; thus,

it is unnecessary to respond to this comment. Nevertheless, the Department provided

ample responses to similar comments received during the 45-day public comment period,

above. Commentor is referred to the preceding responses to the first comment letter, for

further information and justification.

COMMENT 2: Commentor states that the loan disclosure form is confusing and the

requirement is inconsistent with the Guidance for the following reasons:

(i) A lender most likely will not have all of the consumer credit information to meet

the required loan disclosure three day time period. The information the lender

provides to the consumer will likely change and there could be instances

where the consumer could receive inaccurate information.

(ii) The Guidance requires a comparison of loan products; thus, the consumer

would be receiving multiple disclosures relating to the same loan products

which can lead to confusion. The Department’s comparison chart must be

generic as it is in the Guidance rather than customer-specific.

Document PRO 01/07-C-Final

(iii) The CSBS/AARMR and Federal Regulators published model disclosure forms

are intended to provide guidance to lenders. The model disclosure forms are

not a requirement for lenders. It is recommended that the Department allow

the same flexibility in the proposed regulations and the form serve as a “safe

harbor” form rather than the exact form required to be provided by the lender.

(iv) The loan disclosure is confusing as appears to include products beyond those

covered in the Guidance. Commentor suggests clarifying the instruction to

read “…a nontraditional or adjustable rate loan subject to the Guidance

proposed by the lender to ….” This recommended change would ensure that

the comparison disclosure would only be completed for products covered by

the Guidance.

RESPONSE: The Department notes these comments were adequately addressed

in response to the initial comment letter during the 45-day comment period; however, it

adds the following:

As to (i), (ii), and (iii), the Department has provided another option in subsection (d), by

allowing lenders to use their own form, so long as certain conditions are met. This

additional option will allow lenders the flexibility to tailor the form to loan products offered to

the borrower. Although the rule only mandates disclosure one time to the borrower,

nothing in the rule prohibits a lender from providing additional disclosures to the borrower.

In some instances, re-disclosure may be needed to comply with other laws that are

designed to prevent deceptive and fraudulent practices. Finally, it is noteworthy the

Department revised the disclosure requirement to tailor them to products covered by the

Guidance. For these reasons, the changes made by the Department adequately address

the above concerns.

COMMENT 3: The proposed advertising disclosure requirements are confusing

and cover products outside the scope of the Guidance. Commentor states that the

advertising disclosures should be limited to ARM products subject to the Guidance rather

than all ARM products. Commentor also makes the following recommendations to clarify

the regulation:

(i) Sections 1436(e)(1) and 1950.314.8(e)(1) should be amended to read: “Any

representation

advertisement of an installment in repayment of an adjustable

rate, interest only or payment-option loan subject to the Guidance without an

equally prominent disclosure of the following information about the loan, if

applicable:” This section applies to advertisements and should avoid

unnecessary confusion.

(ii) In Sections 1436(e)(2) and 1950.314.8(e)(1), at the end of the sentence after

“documentation” add

“, if applicable.”

RESPONSE: As suggested, the Department has revised subsection (e) to tailor the

provisions to loan products subject to the Guidance. In addition, the Department also

agrees with the need to clarify subsection (e)(1); therefore, it has made necessary

adjustments, to help satisfy the commentor’s concerns. However, it is unnecessary to add

“as applicable” to subsection (e)(2) since the provision applies specifically to certain loan

product advertisements.

Document PRO 01/07-C-Final

COMMENT 4: Commentor opposes Sections 1436(b) and 1950.314.8(b) because

they extend to products beyond the scope of the Guidance, and believes there are

inconsistencies as follows:

(i) Sections 1436(b) and 1950.314.8(b) require written documentation regarding

complaints and “workout arrangements.” Defining complaint in this section would be

helpful for compliance with the requirement to retain complaints as part of the lenders’

books and records.

(ii) The Nontraditional Mortgage Loan Survey product categories are not in line with

the products covered by the Guidance and should be reviewed and revised to provide

accurate and relevant information to the Department.

RESPONSE: These comments raise issues with the original text of regulations;

thus, it is unnecessary to respond to them. Nevertheless, the Department provided ample

responses to similar comments received during the 45-day public comment period, above.

Commentor is referred to the preceding information for further explanations and

justification in response to the first comment letter. For reasons stated above, it is

unnecessary to further define a complaint since its meaning is familiar to licensees, and the

survey is intended to include other types of loan products, as further described above.

4. COMMENTOR: E-mail dated September 4, 2007, from Paul Leonard with

Center for Responsible Lending.

COMMENT 1: Commentor suggests requiring lenders to provide borrowers, who

have not mastered English, with a translated form of the disclosure in one of the five

languages covered by Civil Code Section 1632.

RESPONSE: The issue of requiring disclosure of the form in multiple languages,

under Civil Code Section 1632, would require an amendment to that code section. To

address that issue this year, Assembly Bill 512 was considered but not passed by the

Legislature. The Department will continue to work with interested stakeholders to

determine whether a feasible option can be achieved during the 2008 legislative session. In

the meantime, the Department plans to make its disclosure form available in multiple

languages, consistent with the practice of DRE.

COMMENT 2: Commentor notes that, given the rise in delinquencies and

foreclosures in non-traditional and subprime adjustable rate loans, the Department should

collect data on all workout arrangements, not just those following consumer complaints.

RESPONSE: The Department is currently working with interested stakeholders to

achieve the goals of the commentor, without the need for an additional regulation change

at this time.

COMMENTS RECEIVED DURING THE SECOND 15-DAY COMMENT PERIOD

The Department received four public comment letters during the second 15-day

Document PRO 01/07-C-Final

public comment period, which ended on October 26, 2007. (Note: The Department

published a revised Notice October 10, 2007 to make nonsubstantive changes by

modifying italicized or double underlining in the text of language.) Those comments are

summarized below, together with the Department’s responses.

1. COMMENTOR: E-mail and regular mail letter dated October 24, 2007, from

Mary Jane Seebach with Countrywide Financial Corporation makes the following

comments:

COMMENT 1: Commentor states the Department should adopt the CSBS

Guidance as supervisory guidance, as thirty-six other states and the District of Columbia

have done, and should not promulgate a new rule.

RESPONSE: This reiterates a previous comment made during the initial 45-day

public comment period. In addition to the Department’s previous explanation of necessity

above, the rule is needed to clarify the application of SB 385 (Chapter 301, Statutes of

2007.)

COMMENT 2: Commentor states that Sections 1436(a) and 1950.314.8(a) are

vague and do not provide more detailed direction regarding how the licensee is to

implement the Guidance.

RESPONSE: The Department disagrees. Subsection (a) clarifies and makes

specific the lender’s responsibility to implement best practices, and defines “best practices.”

Thus, no further revisions are needed.

COMMENT 3: Commentor states that the rules should provide explicit definitions

and standards for the implementation of “best practices.”

RESPONSE: The Department disagrees. Again, subsection (a) allows the lender

to adopt best practices, as specified, and provides a definition of best practices. No further

definition or standards are needed.

COMMENT 4: Commentor states that Sections 1436(b) and 1950.314.8(b) fail to

define the terms “consumer complaints” and “workout arrangements” used for “resolved

complaints.”

RESPONSE: The Department disagrees. A definition of workout arrangement is

provided by the rule. The terms “consumer complaint” and “resolved complaints” are

subject to a common industry understanding as complaints are addressed by industry

through complaint-resolution policies or procedures.

COMMENT 5: Commentor notes that Sections 1436(b) and 1950.314.8(b)

contradict the Department’s Initial Statement of Reasons by expanding the reporting

requirements beyond the Guidance. Commentor recommends that the Department clearly

state that loans not subject to the Guidance need not be included in the report.

RESPONSE: The Department disagrees. The reporting form is intended to include

Document PRO 01/07-C-Final

other types of loans (HELOCs and covered loans), for the reasons explained by the

Department above. This form codifies a survey provided during March 2007, as explained

in the Initial Statement of Reasons.

COMMENT 6: Commentor states that Sections 1436(d) and 1950.314.8(d) fail to

define the term “completed application” and recommends that the Department should

define this term.

RESPONSE: As previously stated, the Department believes a “completed

application” is readily understood as a familiar term in the mortgage loan industry;

therefore, no further definition is needed.

COMMENT 7: Commentor notes that the disclosure requirements still create

confusion. Commentor recommends that the Department (1) reference only one

disclosure form, (2) limit the disclosure to only those nontraditional and subprime loans

specifically defined in the Guidance, (3) provide that the disclosures need not be loan or

borrower-specific, and (4) declare that completion and delivery of the form would be

sufficient to satisfy the disclosure requirement.

RESPONSE: In response, the Department has revised the disclosure provisions by

allowing the lender to provide one of the forms, and to tailor these disclosure provisions to

the Guidance. The form is intended to provide information that is relevant to the borrower

based on specific information, such as the proposed loan amount. It is unnecessary to

provide that completion and delivery satisfies the loan provisions, as the rule already

obligates the lender to perform these disclosure activities.

COMMENT 8: Commentor raises concerns regarding the advertising requirements

in Sections 1436(e) and 1950.314.8(e) and recommends the Department incorporate by

reference the definition of “advertisement” used in federal Regulation Z.

RESPONSE: The Department disagrees with the comment because the rules

implement existing state law, and are not intended to reflect federal law. In addition, state

law defines and clarifies advertising, so no further revisions are needed.

COMMENT 9: Commentor recommends that the Department allocate its

examination and enforcement resources to avoid duplicating examinations by endorsing a

collaborative federal and state approach that would create a level playing field in which all

creditors, whether state or federally regulated, would have to meet the same standards and

obligations.

RESPONSE: The Department notes that the comments reiterate commentor’s

original comments made during the initial 45-day comment period. Thus, we refer the

commentor to previous responses to its 45-day comments.

2. COMMENTOR: E-mail and regular mail letter dated October 25, 2007, from

Leland Chan with California Bankers Association.

COMMENT 1: Commentor recommends issuing the Guidance as guidelines rather

Document PRO 01/07-C-Final

than regulations in the same manner that the federal banking agencies did for depository

financial institutions.

RESPONSE: This comment reiterates comments and responses made during the

previous comment period. Thus, commentor is directed to the Department’s previous

response to commentor’s first comment letter, for further explanations. The rules are

intended to require best practices, as specified.

COMMENT 2: Commentor notes that the Guidance does not cover all adjustable

rate mortgages (ARMs), but only those that allow for the deferral of interest or principal, or

have indicators of being subprime. Commentor suggests clarifying that fully-amortized

ARM loans, for example, would not be covered since they are much less likely to pose a

risk of “payment shock.”

RESPONSE: In response, the Department has tailored the rule to ARMs covered

by the Statement on Subprime Mortgage Lending.

COMMENT 3: Commentor states the definition of workout arrangements as

proposed is not clear. Commentor recommends that the Department remove any

reference to workout arrangements.

RESPONSE: The Department disagrees. The definition of workout arrangements

provides sufficient flexibility to lenders, consistent with the Guidance.

COMMENT 4: Commentor states that the Nontraditional Mortgage Loan Survey

contains items that are not necessarily covered by the Guidance. Commentor

recommends tailoring the survey only to loans covered by the Guidance.

RESPONSE: The Department disagrees and, for reasons stated in its initial

response above, has maintained other types of loans (HELOCs and covered loans) to help

assess each lender’s portfolio of risk.

COMMENT 5: Commentor continues to have concerns regarding the mandatory

comparison disclosure form tailored to the applicant. Commentor recommends allowing

lenders to use a form that includes representative, non-tailored, loan programs that

illustrate payments and loan programs generally. Commentor further recommends that the

Department allow lenders a six-month grace period to comply with any newly adopted

forms.

RESPONSE: In response, the Department has revised the disclosure provisions to

tailor them to products covered by the Guidance, and to allow lenders to use their own form

subject to certain conditions. A six-month grace period is unnecessary and inappropriate

given the length of publication of this rule since, May 2007, and the January 1, 2008

effective date of SB 385 (Chapter 301, Statutes of 2007), as discussed above.

COMMENT 6: Commentor recommends incorporating by reference the

advertisement requirements under the federal Truth in Lending Act and Regulation Z of the

Document PRO 01/07-C-Final

Federal Reserve Board.

RESPONSE: The Department disagrees, since the rule is intended to implement

state law. State law defines and clarifies advertising, so no further revision is needed.

3. COMMENTOR: E-mail letter dated October 26, 2007, from David C. Knight with

California Financial Services Association.

COMMENT 1: Commentor objects to the loan disclosure comparison form requiring

customer-specific information.

RESPONSE: The comment raises concerns addressed during the initial 45-day

period. Thus, the Department’s previous response provides an explanation. In addition,

the Department has revised the rule to allow lenders the flexibility to use their own form,

under specified conditions. However, the form is intended to reflect customer-specific

information so the disclosure is relevant to the borrower, and so the form can better assist

the borrower to make informed decisions, as stated above.

COMMENT 2: Customer-specific information creates concerns with the issue of

redisclosure because loan terms may change after the three-day notice requirement.

RESPONSE: The comment raises concerns addressed during the initial 45-day

period. Thus, the commentor can consider the Department’s previous response. In

addition, the Department has revised the rule to allow lenders the flexibility to use their own

form, as specified. Although the rule mandates disclosure one time to the borrower,

nothing in the rule prohibits a lender from re-disclosing (at its own option) to comply with

other provisions of law that are intended to protect against fraudulent or deceptive acts.

Moreover, lenders may also consider other appropriate disclosures on their own forms, to

help address any misunderstanding with borrowers.

COMMENT 3: Commentor recommends that the proposed regulations become

effective 120 days following promulgation.

RESPONSE: The Department disagrees with a 120-day transition period, for

reasons stated in previous responses to comments, above. The rules have been

published since May 2007, and are needed to clarify the application of legislation that

becomes effective on January 1, 2008.

4. COMMENTOR: Letter dated October 26, 2007, from Melissa L. Richards with

Buchalter Nemer on behalf of the California Mortgage Bankers Association.

COMMENT 1: Commentor states it is unclear as to the purpose and intent for

imposing education requirements in Sections 1436(b) and 1950.314.8(b).

RESPONSE: This requirement is consistent with the Guidance referenced in the

rule. Thus, no change is needed.

Document PRO 01/07-C-Final

COMMENT 2: Commentor reiterates concerns requiring completing the

Nontraditional Mortgage Loan Survey (published 5/1/07) which is inconsistent with the

Guidance as noted in its July 5, 2007 comment letter.

Document PRO 01/07-C-Final

RESPONSE: This comment reiterates the commentor’s previous comments; thus,

commentor may review the Department’s previous responses, above, for further

explanations in response to this comment.

COMMENT 3: Commentor reiterates concerns requiring early disclosure as noted

in its July 5, 2007 comment letter. Commentor states a loan-specific disclosure is unduly

burdensome from an operations and compliance standpoint. Furthermore, early disclosure

is not simplistic or meaningful enough that a consumer would want to read or see value in

it. Commentor recommends the federal initiatives replace the third option for disclosure.

RESPONSE: This comment raises the same concerns raised previously by the

commentor. The commentor is referred to the Department’s previous response to this

comment. As stated above, the disclosure form is intended to reflect customer-specific

information such as loan amount, monthly payments and loan balance scenarios. This

information will enable borrowers to make informed choices as early as possible in the loan

process.

COMMENT 4: Commentor states the advertising requirements run afoul of Fair

Credit Reporting Act and suggests the Department defer to the Federal Reserve Board

efforts to formulate a new Truth In Lending Act/Regulation Z.

RESPONSE: The Department disagrees and is unaware of any conflict with federal

law. Nor does commentor specify any conflict. Thus, no further changes will be made.

COMMENT 5: Commentor requests extending the effective date to implement

rules.

RESPONSE: As stated in previous responses above, it is unnecessary to extend

the effective date given that rules have been published since May 2007 and the effective

date of SB 385 (Chapter 301, Statutes of 2007) is January 1, 2008. These rules are

needed to clarify and make specific that legislation. It is also noteworthy that similar

disclosure and advertising rules for mortgage brokers operating under the Real Estate Law

have been in effect since September 2007.

o 0 o

Document PRO 01/07-C-Final