BASIC PROVISIONS OF FINANCIAL CODE § 4970

California Financial Code § 4970 et seq. became effective on July 1, 2002. This law recognizes the need for more stringent regulations on consumer loans secured by specified real property, defined as “covered loans.” The effect of the bill was best summed up by the Legislative Counsel’s digest, which states:

The law prohibits various acts in making covered loans, including the following:

• Failing to consider the financial ability of a borrower to repay the loan
• Financing specified types of credit insurance into a consumer loan transaction
• Recommending or encouraging a consumer to default on an existing consumer loan in order to solicit or make a covered loan that refinances the consumer loan
• Making a covered loan without providing the consumer specified disclosure

Moreover, this law expressly defines the relationship between the broker and the borrower as a fiduciary relationship, thereby placing a legal duty on the broker to act in the borrower’s best interest.Furthermore, the newly enacted provisions clearly lay out strong incentives for attorneys to vigorously prosecute predatory lending. Under California Financial Code § 4978, these incentives include mandatory attorney fees, the award of punitive damages, and the greater of either actual damages or statutorily prescribed damages when the violation is “willful and knowing.”

(a) A person who fails to comply with the provisions of this division is civilly liable to the consumer in an amount equal to actual damages suffered by the consumer, plus attorney’s fees and costs. For a willful and knowing violation of this division, the person shall be liable to the consumer in the amount of $15,000.00 or the consumer’s actual damages, whichever is greater, plus attorneys’ fees and costs…..

(b)(2). A court may, in addition to any other remedy, award punitive damages to the consumer upon a finding that such damages are warranted pursuant to Section 3294 of the Civil Code.

Accordingly, if either an express violation of this section or abuse of the fiduciary relationship between broker and borrower is established, private attorneys and their clients are now equipped with statutory power to obtain redress.

Although California Financial Code § 4970 paints with a broad stroke, with its specificity, predatory lenders will undoubtedly find loopholes in the regulations. Fortunately for California consumers, actions for predatory lending can also be brought under the very expansive state consumer protection statutes, such as Business and Professions Code §17200.

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