California Mortgage Lending Practices, Loan Terms, and Disclosures
The disclosure clock
Federal Regulation Z and RESPA, enforced in California alongside state law, drive timing. The Loan Estimate goes out within three business days of application and may be revised only on a valid changed circumstance. The Closing Disclosure must be received by the borrower at least three business days before consummation. A refinance of a principal dwelling carries a three-business-day right of rescission after consummation. Know the vocabulary: note rate versus APR versus APOR - the APR is the all-in cost of credit, while the APOR is the average prime offer rate used as a benchmark for high-cost and higher-priced determinations.
Cost and term rules
California's covered-loan provisions (Financial Code Section 4970 et seq.) restrict points and fees, prepayment penalties and certain loan features when the loan exceeds statutory thresholds. On residential mortgages secured by one-to-four units, late charges are capped at 6% of the overdue principal and interest installment and may not be imposed until the payment is more than ten days past due. Prepayment penalties on residential mortgages are tightly limited, and barred entirely for high-cost loans within the first five years.
Ability to repay
Stated-income, no-documentation lending is not permissible; the originator must verify and document the borrower's ability to repay using verified income, assets, debts and residual income analysis where required.
Traps
Watch for a question offering to "reissue the Closing Disclosure on the day of signing" - that violates the three-day rule. Also beware confusing the ten-day late-charge grace period with a right to cure, and mixing up rescission (refinance, principal dwelling) with purchase transactions, which do not rescind.
Rule of thumb: three, three, three - Loan Estimate within three business days of application, Closing Disclosure three business days before consummation, three days to rescind a refinance.