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					                                                                                       Committee Agenda Date : May 7, 2009
                                                                                                        Agenda Item No. 7

County of Santa Clara
Clerk of the Board
Boards & Commissions
Advisory Commission on Consumer Affairs

PSJC01-050709                                                             .
                                                             Prepared by:. Whitney Densmore
                                                                           Board Clerk I
                                                            Reviewed by:. Marilyn Anderson
                                                                          COB Supervising Board Clerk

DATE:           May 7, 2009

TO:             Supervisor.George.Shirakawa, Chairperson
                Supervisor.Donald F..Gage, Vice Chair
                Public Safety & Justice Committee


                Maria Marinos
                Clerk of the Board

SUBJECT:        Advertisement of Minimum Payments and/or Interest Rates Associated with "Negative Amortization"
                Type Loans

Consider recommendations from the Advisory Commission on Consumer Affairs relating to the advertisement of
minimum payments and/or interest rates associated with negative amortization ("NegAm") type loans.

Possible actions:

     a. Recommend that the Board of Supervisors impose a ban on advertising minimum
        payment amounts and/or minimum payments calculations for all mortgage loan
        advertisements in Santa Clara County.
     b. Request that the Board of Supervisors work with the State of California to develop a
        State-wide ban.

                                                                                              Committee Agenda Date : May 7, 2009
                                                                                                               Agenda Item No. 7

There are no fiscal implications relating to this recommendation.

To curb and eventually eliminate misleading, fraudulent, and predatory lending practices by mortgage lenders, banks,
and third party loan originators (brokers) who take advantage of some consumers’ lack of knowledge in order to gain

Minimum payment calcluations are not true indications of the Annual Percentage Rate (APR) and/or the full
interest-charged payment.

A "Negative Amortization" loan is a loan in which the principal amount of the loan (i.e. the amount which is borrowed)
can increase to 110 percent, 115 percent, or 125 percent, of the amount initially borrowed because the borrower has an
"option" to defer interest. The deferred interest is never mentioned in an advertisement for negative amortization loans.

A sample negative amortization loan calculation is as follows.

Mortgage Shopper "A" chooses to take a negative amortization loan (often referred to as a "neg am loan") secured by the
equity in his/her home. Shopper "A" borrows $500,000 at an annual rate of 7.00 percent interest or $35,000/annual
interest ($2,916.67/per month). However, "A" is not obligated to pay the interest owed to the lender under this loan
program. Rather, "A" has an "option" to pay a part of the interest owed to the lender – this is called a "minimum
payment option." The "minimum payment option," with most negative amortization loans, is calculated based on 1.25
percent on a 30 year amortization. In this particular example, the minimum payment option would be $1666.26 per
month. "A" owes $2,916.67 per month in interest, but would be paying only $1666.26 per month. The difference is
$1250.41 which is then added to "A's" principal each month. This minimum payment option will go on until "A" reaches
a predetermined "cap" set by the lending institution. In most cases, the cap is 115 percent of the original amount
borrowed, and can be as high as 125 percent in many cases. Once "A's" "option" runs out, "A" is then obligated to pay
interest plus principal monthly, for the remainder period of the loan. In this example, the minimum payment would run
out in the 59th month of the 360-month term, at which point "A" will have 301 months to pay back $575,000 (115
percent of the $500,000 initially borrowed) at the effective interest rate. "A's" new monthly payment would then be

A typical advertisement for a "Negative Amortization" loan only shows the 1.25 percent minimum payment rate and/or
the $1666.26 minimum payment amount, neither of which are actual or effective interest dollars due. This can be
misleading to a consumer because it only refers to a "1.25 percent" interest rate and/or it refers to a $1666.26 minimum
monthly payment, neither of which is sufficient to cover the effective interest on the amount borrowed.

Consumers may fall prey to misleading and/or fraudulent advertising practices.

The Deputy Clerk will inform the Advisory Commission on Consumer Affairs of action taken by the Public Safety and
Justice Committee.


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