Understanding New Criminal Liability Standards For Lenders And Brokers
Originally published for the California Mortgage Association, this analysis examines AB 3108’s significant impact on mortgage lending practices.
Legislative Background
In September 2024, Governor Newsom signed Assembly Bill 3108 into law, amending California Financial Code Section 4973 and critically revising Penal Code Section 532f. These amendments fundamentally alter the threshold for criminal mortgage fraud liability, creating new exposure for lenders, brokers, and loan originators. AB 3108 becomes effective January 1, 2025.
Legislative Intent Behind AB 3108
California legislators identified rising predatory lending practices as the catalyst for AB 3108. Despite previous legislative efforts, mortgage fraud continued proliferating since 2008. The Consumer Federation of California reported California ranking fourth nationally in “mortgage fraud risk,” prompting lawmakers to strengthen consumer protections and clarify mortgage fraud statutes.
AB 3108 represents a consumer protection measure designed to combat predatory lending while providing borrowers enhanced tools to challenge fraudulent practices.
Critical Changes To Penal Code Section 532f
Lowered Fraud Threshold In Section 532f(a)(4)The most significant revision to Penal Code 532f involves a single word substitution that dramatically lowers criminal liability thresholds. Previously, Section 532f(a)(4) required “deliberate” misstatements, misrepresentations, or omissions in filed mortgage documents. AB 3108 replaces “deliberate” with “material.”
This distinction proves crucial: individuals can now commit mortgage fraud by filing documents containing material misstatements they know to be false, regardless of whether they deliberately created the false information.
Knowledge Requirement RemainsWhile AB 3108 lowers the fraud threshold, prosecutors must still prove the accused party possessed actual knowledge of material misstatements. This knowledge requirement provides critical protection for lenders who unknowingly receive fraudulent information from borrowers during loan applications.
However, lenders must exercise heightened diligence. If a lender becomes aware of fraudulent borrower-provided information, proceeding with the loan could trigger criminal liability under revised Section 532f(a)(4).
New Offenses For Business Purpose Loan Brokers And Originators
AB 3108 adds entirely new criminal provisions specifically targeting business purpose lending through new Sections 532f(b)(1) and 532f(b)(2). These provisions address a previously unregulated gap in California mortgage fraud law.
Section 532f(b)(1): Business Purpose Loan MisrepresentationMortgage brokers and originators commit mortgage fraud under Section 532f(b)(1) when they:
1. Possess intent to defraud;
AND
2. Instruct or deliberately cause borrowers to sign business, commercial, or agricultural loan documents;
WITH
3. Knowledge that loan proceeds will actually be used primarily for personal, family, or household purposes
This provision directly addresses fraudulent “business purpose” loan characterizations designed to evade consumer lending regulations and protections.
Section 532f(b)(2):
Bridge Loan Misrepresentation-Mortgage brokers and originators commit mortgage fraud under Section 532f(b)(2) when they:
1. Possess intent to defraud;
AND
2. Instruct or deliberately cause borrowers to sign bridge loan documents;
WITH
3. Knowledge that loan proceeds will not be used to acquire or construct a new dwelling
For purposes of this section, “bridge loan” means a temporary loan with maturity within one year or less, intended for acquisition or construction of a dwelling that will become the borrower’s principal residence.
Practical Implications For Private Lenders
Enhanced Due Diligence RequirementsLenders, brokers, and originators must implement or strengthen due diligence procedures, including:
1. Business Purpose Verification: – Obtain written certifications from borrowers confirming business, commercial, or agricultural use of loan proceeds – Document borrower’s business plans and intended property use – Verify borrower business entity structure and operations – Maintain contemporaneous records of loan purpose discussions
2. Bridge Loan Purpose Confirmation: – Obtain written confirmation that proceeds will acquire or construct borrower’s new principal residence – Document acquisition or construction plans – Verify timeline for occupancy as principal residence
3. Red Flag Protocols: – Establish procedures for investigating inconsistencies between stated loan purpose and borrower circumstances – Implement mandatory legal review when red flags emerge – Create clear decision-making protocols for proceeding or declining suspicious transactions
Stop–Work Procedures– If lenders, brokers, or originators discover that stated loan purposes are false, they must not proceed with the transaction. Continuing with loans after discovering fraudulent purpose characterizations creates direct criminal liability under AB 3108.
Risk Analysis And Penalties
Civil Penalties: Financial Code Section 4973Violations of Financial Code Section 4973 subject violators to civil liability, including:
- Statutory damages
- Actual damages to affected parties
- Attorney’s fees and costs
- Administrative penalties and sanctions
Criminal Penalties – Penal Code Section 532f – Penal Code Section 532f violations constitute public offenses punishable as:
The felony/misdemeanor charging decision lies within prosecutorial discretion, typically based on fraud severity and defendant criminal history.
Strategic Recommendations
Immediate Action Items:
1. Review Current Practices: Audit existing loan origination procedures for business purpose and bridge loan underwriting
2. Update Documentation: Revise loan applications and disclosures to include explicit borrower certifications regarding loan purpose
3. Training: Educate all loan personnel on AB 3108 requirements and red flag identification
4. Legal Consultation: Engage California lending counsel to review compliance procedures
Long-Term Compliance Strategies
1. Implement Robust Verification Systems: Develop multi-layer verification processes for confirming stated loan purposes
2. Create Audit Trails: Maintain comprehensive documentation showing diligence efforts and decision-making processes
3. Regular Compliance Reviews: Conduct periodic audits of loan files to ensure ongoing AB 3108 compliance
4. Industry Monitoring: Stay informed of enforcement actions and evolving regulatory interpretations
Conclusion
AB 3108 represents California’s most significant expansion of mortgage fraud criminal liability in recent years. The legislation’s focus on business purpose loan mischaracterization reflects legislative concern about consumer lending regulation evasion.
Lenders, brokers, and originators must proactively adapt procedures to comply with AB 3108’s enhanced standards. The lowered threshold for criminal liability—combined with entirely new offenses targeting business purpose lending—demands immediate attention and strategic compliance planning.
Organizations with questions about AB 3108’s impact on their specific lending products or practices should consult qualified California lending counsel to develop tailored compliance strategies.
About Geraci LLP
Geraci LLP provides comprehensive legal counsel to private lenders, mortgage brokers, and financial services companies nationwide. Our compliance team assists clients with California regulatory requirements, risk mitigation strategies, and business purpose lending compliance.
