SB 127

Under current law, a residential mortgage loan is a loan secured by a first lien

real estate mortgage on, or equivalent security interest in, a one-family to

four-family dwelling that the borrower uses as his or her principal place of residence.

A manufactured home transaction is a consumer credit sale of, or a consumer loan

secured by a first lien or equivalent security interest in, a manufactured home or

mobile home. A variable rate loan is a residential mortgage loan or manufactured

home transaction the terms of which permit the interest rate to be increased or

decreased.

Current law imposes various requirements and limitations on variable rate

loans, including limitations on adjustments to the interest rate of a variable rate

loan. If interest rate adjustments correspond to an index, the index must be an

approved index. An approved index is an index that is either one of certain specified

indexes or is an index readily verifiable by borrowers, beyond the control of an

individual lender, and approved by the applicable state regulator, such as the

Division of Banking in the Department of Financial Institutions (DFI) or the Office

of Credit Unions attached to DFI. Interest rate adjustments must correspond to

upward and downward changes in the approved index, except: the lender may

decrease the interest rate or decline to increase the interest rate at any time; and,

the lender may decline to decrease the interest rate if this offsets prior interest rate

increases declined by the lender. Also, interest rate decreases may be limited only

if interest rate increases are limited at least to the same extent.

This bill allows a lender making a variable rate loan based on an approved

index to include a lower, discounted initial interest rate. During the initial interest

rate period, provisions of current law related to the approved index do not apply, but

they do apply after expiration of the initial interest rate period. The bill also

eliminates the provision that interest rate decreases may be limited only if interest

rate increases are limited at least to the same extent.