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California Bans Neg Am Loans

Posted by: Chris Palmeri on October 19, 2009


California Governor Arnold Schwarzenegger signed a flurry of bills designed to reign in abuses in the mortgage market today.

The new laws eliminate the use of negative amortization features in “high-priced loans,” which are those charging more three percentage points above a U.S. Treasury bond of the same duration.

Neg am (also known as pay option or pick-a-payment loans) allowed borrowers to skip payments and roll some of their interest costs on to their principal. It was a gimmick popular during the boom because it made a borrower’s monthly payments lower. But it only increased the amount they owed. Note: the ban appears to only apply to “high-priced” loans the definition of which sounds a lot like subprime loans.

The new laws also:

Cap mortgage prepayment penalties at 2% for the first year and 1% after that, also in high-priced loans.

Establish standardized licensing requirements for all loan originators.

Make it a felony to commit fraud in connection with a mortgage application.

Require lenders to provide prospective reverse mortgage borrowers with a clear and informative disclosure statement and checklist pertaining to the risks of those loans.

Prohibit a seller of residential property from requiring the buyer to use an escrow service company or purchase title insurance chosen by the seller and would also prohibit a seller of residential property from disapproving the use of a title or escrow company chosen by the buyer.

Require mortgage loan documents to be translated into the language the verbal negotiations were conducted. Mortgage documents would be translated into Spanish, Chinese, Tagalong, Korean and Vietnamese languages.

Reader Comments

Paul Platosh

October 20, 2009 12:39 AM

The language referred to in the article is properly spelled as "Tagalog"


October 20, 2009 4:07 AM

This law is the kiss of death for California real estate. Fortunately for Big Bankers and Big Mortgage Lenders this law bars their ability to extract maximum fees from real estate loan as well as predatory lending practices. However, the Big Lenders will just raise the interest rate to recoup the difference. Without such evils incorporated in sub-prime loan, subprime lenders are loath to lend to subprime borrowers who henceforth can't buy their entry home and the seller can't move up to a higher price home. The cascading effect will cause California real estate to join the rest of California economy in the dumpster. In the wake of the real estate bubble bust and financial collapse of Wall St, California, the Golden State, is insolvent, living day-by-day on a patchwork of budget cuts and tax levy. Without new homes sales to by-pass Prop 13 tax limitation, California's State treasury soon will be as dry as the Mojave Desert.


October 20, 2009 11:41 AM

Wow, the state that allowed the most radical types of predatory lending has finally banned the Neg-am loan. Too bad it is about 5yrs too late to fix the problem...nobody is selling Neg Am's in a receding market...they are only popular when the market is expanding.

good job Arnie, way to get ahead of the problem...LOL.


October 20, 2009 5:32 PM

Traditional loans are all bogus.


October 22, 2009 1:02 PM

Better Late than never. There are now companies out there auditing this problemed loans, but it is still sad that so many people were taken advantage of and they are now losing their homes. Elderly abuse especially because they trusted the one that was looking out for them, when in fact they were looking out for themSELVES.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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