Private lenders and mortgage professionals operating in California face a significant shift in criminal liability under Assembly Bill 3108 (AB 3108). Signed by Governor Newsom and effective as of January 1, 2025, this legislation amended both Section 532f of the California Penal Code and Section 4973 of the Financial Code. The practical result is a lower bar for criminal mortgage fraud prosecution and new obligations for business purpose loan brokers and originators.
For private lenders, bridge loan providers, and mortgage brokers, understanding these changes is not optional. Failure to adapt compliance practices could expose your organization to felony charges, civil liability, and lasting reputational harm.
Why the California Legislature Enacted AB 3108
California has consistently ranked among the top states for mortgage fraud risk. According to data compiled by the Consumer Federation of California, predatory lending continued to rise despite multiple rounds of legislative reform following the 2008 financial crisis. Legislators concluded that existing fraud statutes lacked the teeth necessary to hold bad actors accountable, particularly in cases where misrepresentations fell short of the prior “deliberate” standard.
AB 3108 was drafted as a consumer protection measure with two primary goals: strengthen enforcement tools against predatory lending and close gaps that allowed fraudulent conduct to go unpunished when it could not be proven as intentional.
The Critical Change: From “Deliberate” to “Material”
The most consequential amendment under AB 3108 targets Section 532f(a)(4) of the Penal Code. Before this law took effect, prosecutors had to demonstrate that a person knowingly filed a document containing a deliberate misstatement, misrepresentation, or omission with the county recorder in connection with a mortgage loan transaction.
AB 3108 replaced the word “deliberate” with “material.” This single-word change carries enormous practical weight. Under the current law, criminal mortgage fraud can be established if a person has knowledge that a filed document contains a material misstatement, misrepresentation, or omission — regardless of whether the error was intentional.
What This Means for Lenders
The prior standard required prosecutors to prove the filing party acted with deliberate intent. The revised standard only requires proof that:
1. A document was filed with the county recorder related to a mortgage transaction 2. The document contained a material misstatement, misrepresentation, or omission 3. The person who filed it had knowledge of that material deficiency
This broadened scope means that even negligent or reckless handling of loan documentation could trigger criminal exposure if a prosecutor can demonstrate the filer was aware of the inaccuracy.
New Criminal Provisions for Business Purpose Loan Brokers and Originators
Beyond revising existing language, AB 3108 introduced entirely new provisions under Penal Code Section 532f(b)(1) and (b)(2). These additions create specific criminal offenses targeting mortgage brokers and loan originators who act with intent to defraud in two scenarios.
Business Purpose Loan Misrepresentation (Section 532f(b)(1))
Under the new provision, a broker or originator commits mortgage fraud if they act with intent to defraud and:
- Instruct or deliberately cause a borrower to execute documents for a business, commercial, or agricultural loan while knowing that the loan proceeds are actually intended primarily for personal, family, or household use
This provision directly addresses a well-known compliance gap in private lending. Business purpose loans are exempt from many consumer protection regulations, including the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Some unscrupulous brokers have historically exploited this exemption by structuring consumer loans as business purpose transactions to avoid regulatory scrutiny.
Bridge Loan Misrepresentation (Section 532f(b)(2))
The second new provision targets bridge loan transactions. A broker or originator commits mortgage fraud if they act with intent to defraud and:
- Instruct or deliberately cause a borrower to execute documents for a bridge loan while knowing the loan proceeds will not actually be used to acquire or construct a new dwelling
For purposes of this section, a bridge loan is defined as a temporary loan with a maturity date of one year or less, used for the acquisition or construction of a dwelling intended to become the borrower’s principal residence.
Implications for the Private Lending Industry
These provisions represent entirely new criminal territory. Prior to AB 3108, no specific criminal statute addressed the mischaracterization of loan purpose by brokers or originators. Professionals working in business purpose lending must now verify and document the actual intended use of loan proceeds with heightened diligence.
It is worth noting that bridge loans falling under this definition are very likely to be deemed consumer purpose transactions, since the dwelling would become the borrower’s principal residence. While business purpose lenders should remain aware of Section 532f(b)(2), this provision is of particular concern for those working with consumer mortgage products.
Compliance Strategies for Private Lenders and Brokers
Given the expanded scope of criminal liability, lenders, brokers, and originators should take proactive steps to protect themselves:
- Strengthen borrower certification processes — Require written confirmation from borrowers that loan proceeds will be used for the stated business, commercial, or agricultural purpose
- Enhance due diligence procedures — Implement additional verification steps to confirm the actual intended use of funds before closing
- Document everything — Maintain detailed records of all borrower representations regarding loan purpose, including emails, signed certifications, and underwriting notes
- Cease proceeding when red flags appear — If at any point a broker or originator becomes aware that a borrower’s stated loan purpose does not match the actual intended use, the transaction should be halted immediately
- Review bridge loan practices — For bridge loans, obtain written confirmation that funds will be used to acquire or construct a dwelling in which the borrower intends to reside
- Train staff on the new standards — Ensure all team members involved in origination and brokering understand the difference between the old “deliberate” standard and the current “material” standard
Criminal Penalties Under the Revised Statutes
The penalty structure for violations of Penal Code Section 532f has not changed with AB 3108, but the expanded scope of conduct that qualifies as a violation makes these penalties more relevant than ever:
- Misdemeanor: Up to one year of imprisonment in county jail
- Felony: Imprisonment ranging from 16 months to three years in state prison
Violations of Financial Code Section 4973 continue to carry civil liability, which can include monetary damages, injunctive relief, and regulatory sanctions.
The Knowledge Requirement Remains a Key Defense
While AB 3108 significantly lowered the threshold for criminal mortgage fraud, one important safeguard remains: the knowledge requirement. Prosecutors must still prove that the defendant had actual knowledge of the material misstatement, misrepresentation, or omission.
This is particularly relevant in situations where fraudulent information originates from the borrower during the application process. If a lender has no reason to know that a borrower’s representations are false, the knowledge element would not be satisfied. However, lenders should not rely on this defense as a substitute for robust due diligence. If a lender later discovers that borrower-provided information is fraudulent and proceeds with the loan anyway, the knowledge requirement would likely be met.
How Geraci LLP Helps Private Lenders Navigate AB 3108
Geraci LLP has served the private lending industry for nearly two decades, providing legal counsel to lenders, brokers, and fund managers across California and nationwide. Our attorneys understand the practical realities of business purpose lending and can help your organization adapt its compliance framework to the requirements imposed by AB 3108.
Whether you need assistance reviewing your due diligence policies, updating borrower certification forms, or understanding how these changes affect your specific lending products, Geraci LLP is here to help.
- Phone: (949) 403-3488
- Address: 90 Discovery, Irvine, CA 92618
This article is provided for informational purposes only and does not constitute legal advice. Lenders, brokers, and originators seeking guidance on how AB 3108 affects their specific operations should consult with qualified legal counsel.
