California Assembly Bill 3108 became effective on January 1, 2025 and could conceivably make certain business purpose loans secured by owner-occupied property subject to mortgage fraud claims by the borrowers. The primary goal of the new law—passed unanimously by the State Assembly and nearly unanimously by the State Senate (with one apparent absentee)—is to protect borrowers from certain predatory practices by mortgage lenders and brokers. However, unintended consequences may arise.

Assembly Bill 3108 makes it felony mortgage fraud for a “mortgage broker or person who originates a loan” to intentionally:

1. Instruct or otherwise deliberately cause a borrower to sign documents reflecting the terms of a business, commercial, or agricultural loan, with knowledge that the borrower intends to use the loan proceeds primarily for personal, family, or household use.
2. Instruct or otherwise deliberately causes a borrower to sign documents reflecting the terms of a bridge loan, with knowledge that the loan proceeds will be not used to acquire or construct a new dwelling. For purposes of this subdivision, a bridge loan is any temporary loan, having a maturity of one year or less, for the purpose of acquisition or construction of a dwelling intended to become the consumer’s principal dwelling.

This law is clearly intended to go after bad actors with respect to both mortgage loans and bridge loans. However, it also opens up the possibility that a delinquent or defaulting borrower with a business purpose loan could claim that the mortgage lender or broker committed a felony by persuading the borrower to claim that the loan was made for business purposes when the lender knew that the loan was actually for personal purposes.

Putting It Into Practice: All mortgage lenders and mortgage brokers should have policies in place for determining and documenting when loans are made for business purposes. This is the time to review those policies and make sure they are as protective as possible. At a minimum, those policies should include the following:

• Obtain a handwritten letter signed in the lender’s presence by the borrower detailing the business purpose of the loan.
• Gather corroborating evidence of the business purpose, such as financial statements and invoices.
• Have the applicant sign a business purpose certificate.
• If possible, fund the loan proceeds to a business bank account.
• Consider recording a telephone conversation with the applicant discussing the business purpose, but be sure to inform the applicant that the call is being recorded, as required by California law.
• Consider obtaining a legal opinion from the borrower’s counsel.

Having these policies in place could significantly reduce the risk that a borrower will later claim that the mortgage lender or broker has committed felony mortgage fraud in violation of AB 3108.

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