California mortgage lenders should adjust their lending operations and compliance strategy after the state passed multiple bills last week.

Among the bills signed by California Gov. Gavin Newsom, he approved Assembly Bill 2050, which requires homeowners associations to hold a minimum reserve contribution, and AB 801, also known as the California Fair Lending Examination Act.

The HOA bill won't cause a sweeping change to lenders' operations, as this change has been in the works long enough for companies to adjust. Rather, the law will bring more lenders to the condo market, with a minimum reserve requirement set to make warrantable financing easier to access, Jay Voorhees, founder of JVM Lending, told National Mortgage News.

"It was not too surprising and it's not too concerning because lenders have already been cracking down on reserve requirements," he added. "Some of these condo complexes that weren't maintaining enough reserves to qualify for Fannie [Mae] and Freddie [Mac] requirements now may be forced to because of this bill."

The bill also bridges a gap between lenders, real estate agents and HOAs. Most issues in condo financing are typically established further upstream with the HOA, which loan officers and real estate agents don't have access to. The law ensures HOAs are financially sound and enforces the same reserve requirements lenders have been subject to by Fannie and Freddie, Mosi Gatling, senior vice president of strategic growth and expansion, told National Mortgage News.

As a result, the bill is likely to create more competition in the warrantable condo space, which likely ends in a battle for the lowest rate, especially with minimal volume, Voorhees said.

Meanwhile, the fair lending act will have more of a direct impact on lenders. The law requires oversight, particularly of independent mortgage companies, for discrimination in mortgage lending, including disparate impact.

"They need to be very careful with their marketing, and also with respect to the types of demographics they service with their actual lending," Voorhees said. "You have to be careful you're not falling into disparate impact range, where you're going to get slapped with a fine or an audit or anything of that nature because the [Consumer Financial Protection Bureau] used to be very aggressive when it came to disparate impact, and it was kind of unfair to lenders."

Voorhees recommends lenders hire a compliance officer that overlooks marketing and ensures it targets all demographics. 

Rami Ibrahim, program manager of economic equity at The Greenlining Institute, said lenders should also work with organizations that provide homeownership counseling and maintain a close relationship with regulators.

"Compliance is extremely important because these guys will go after people to make examples of," Vorhees said. "Bigger operations need to be much more careful because they are much bigger trophies for regulators."

The bills in detail

AB 2050 mandates that HOAs proactively fund their reserves to prevent financial shortfall and delayed maintenance. Beginning Jan. 1, 2032, if an HOA's reserve account is projected to fall below zero at any point over a 30-year period, it is required to transfer at least 15% of its gross annual budget into a reserve fund.

"AB 2050 helps California homeowners in communities plan more effectively for major repairs and future capital needs, giving lenders greater confidence that properties are financially prepared and helping preserve access to mortgage financing for buyers and homeowners," Dawn Bauman, CEO of the Community Associates Institute, told National Mortgage News.

The fair lending act requires the California Department of Financial Protection and Innovation to examine banks, credit unions and licensed independent mortgage companies under its jurisdiction for compliance with state and federal fair lending laws at least once every four years. 

Strong state oversight is particularly important for independent mortgage companies, which have become a primary source of mortgage credit for communities of color, The Greenlining Institute, the official sponsor of the bill, said in a press release Monday.

"While the Trump administration guts federal fair lending enforcement and lets big banks and corporate lenders off the hook, California is holding the line," Assemblymember Mia Bonta, who authored the bill, said in the release. "I'm grateful to Governor Newsom for signing this bill, and to our coalition partners who fought to hold corporate lenders accountable in the face of Washington's rollback of consumer protections."