The California Department of Business Oversight* ("DBO") appears to have backed off of its pronouncement late last year that lenders may not deliver per diem disclosures to all borrowers.
California's infamous per diem statutes (Fin. Code § 50204(o); Civ. Code § 2948.5) have been the basis of scores of licensing agency examination findings and actions for many years now, resulting in significant refunds and penalties. In fact, just last week the DBO announced that a lender had agreed to pay a settlement of $1.4 million for per diem violations. That is just one of many such settlements that often run into the many hundreds of thousands of dollars or more. One reason for this is the lack of certainty in agency interpretation. Just one example of that uncertainty was addressed by the DBO at the California Mortgage Bankers Association's ("CMBA's") Legal Issues and Regulatory Compliance Conference this past December.
Before discussing the DBO's statement at the conference, it will be helpful to briefly describe the per diem statutes. They essentially prohibit a residential mortgage lender from assessing a borrower per diem interest for more than one day prior to the date that the loan proceeds are disbursed from escrow. The lender may, however, collect interest starting on the business day immediately preceding the day of disbursement, if:
- The borrower affirmatively requests, and the lender agrees, that the disbursement will occur on Monday, or a day immediately following a bank holiday, and
- The following information is
disclosed to the borrower in writing:
- the amount of additional per diem interest charged to facilitate disbursement on Monday or the day following a holiday, as the case may be, and
- that it may be possible to avoid the additional per diem interest charge by disbursing the loan proceeds on a day immediately following a business day.
The lender must deliver this disclosure – which is commonly referred to as a "Per Diem Disclosure" – to the borrower and have the borrower sign it prior to the date the lender delivers the loan proceeds to the closing agent.
At the CMBA conference, a DBO representative commented that the "[t]he [Department] will reject a per-diem interest disclosure" if, among things, it is routinely provided to all borrowers. In short, the DBO took the position that the Per Diem Disclosure is not a routine form to be provided to all borrowers, but should instead be provided only when the borrower affirmatively requests the disbursement of loan proceeds to occur on a Monday or after a bank holiday. The DBO then articulated the position that if a lender did deliver the disclosure to all borrowers, the DBO would treat the Per Diem Disclosure as being improper, and would permit the lender to collect only one day of per diem interest instead of three days' interest. Thus the lender would lose two days' interest, even though the lender was paying its warehouse lender for those two days and even though the borrower had use of the loan proceeds for those two days.
Mayer Brown received calls from a number of clients expressing concern with the DBO's position. To our knowledge, the DBO had not made the industry aware of its position prior to the conference. We believe the DBO's position constitutes an underground or stealth regulation, which is unenforceable under California law.
The lending community has a number of reservations with the DBO's position. Lenders often do not know until the last minute whether the loan will close on the scheduled date. For example, assume loan proceeds are to be disbursed by the closing agent on a Friday, but for some reason disbursement is delayed until Monday (these delays are typically for reasons beyond the lender's control). The lender is placed in the difficult or impossible position of preparing and delivering a Per Diem Disclosure, and obtaining the borrower's signature on the disclosure, in one day's time or less. For that reason, most lenders have delivered the disclosure to all borrowers. Perhaps more to the point, the plain language of the statute does not appear to support the DBO's position.
When Mayer Brown posed this issue to the DBO, the DBO responded that while it continues to believe that the Per Diem Disclosure is not a routine form, this practice would not result in an automatic violation or an automatic disallowance of extra per diem interest. The DBO nevertheless expressed concerns with the practice of routinely providing the Per Diem Disclosure. The DBO said that it believes, based on its experience, that when lenders routinely deliver Per Diem Disclosures to all borrowers, the disclosures are often missing information or contain incorrect information, in violation of the per diem statutes and the DBO's books and records requirements. Consequently, the DBO will continue to take exception during examinations when the disclosures contain blank spaces or incorrect information.
So lenders can now choose to deliver the Per Diem Disclosure to all borrowers, or only to those whose loans are scheduled to disburse on a Monday or a day following a holiday. But according to the DBO, those that choose the former should ensure that the Per Diem Disclosures they deliver to the borrower are complete with no blank spaces, and accurate.
* While there are three licensing regimes under which a California residential mortgage lender may operate, the DBO licenses the vast majority of lenders.
Originally published April 18, 2017
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