Civil Code section 1916.7

(a)

Section 1916.5, 1916.6, 1916.8, and 1916.9 of the Civil Code, and any other provision of law restricting or setting forth requirements for changes in the rate of interest on loans, shall not be applicable to loans made pursuant to this section.

(b)

A mortgage loan made pursuant to the provisions of this section is an adjustable-payment, adjustable-rate loan, on the security of real property occupied or intended to be occupied by the borrower containing four or fewer residential units and incorporating terms substantially as follows:

(1)

The term of the loan shall be not less than 29 years, repayable in monthly installments amortized over a period of not less than 30 years.

(2)

Monthly payments may be adjusted to reflect changes in the variable interest rate of the loan. Changes in interest and monthly payment shall not occur more often than twice during any annual period and at least six months shall elapse between any two changes. The rate of interest and monthly payments shall not change during the first semiannual period. The amount of any increase in monthly payment shall not exceed 7.5 percent annually.

(3)

Monthly payments may also be established on a graduated basis within the parameters of a loan originated pursuant to the provisions of this section. A graduated payment adjustable mortgage loan shall meet all the requirements of this section and shall set forth in the note, at the time of origination, limitations on the rate of increase in the scheduled payments due both to graduation and to changes in the interest rate.

(4)

Whenever any monthly installment is less than the amount of interest accrued during the month with respect to which the installment is payable, the borrower shall have the option to select one, or any combination of, the following:

(A)

Notwithstanding paragraph (2) of subdivision (b), increase the monthly installment in an amount which at least covers the increase in interest.

(B)

Have the difference added to the principal of the loan as of the due date of the installment and thereafter shall bear interest as part of the principal. In no instance shall the difference which is added to the principal be an amount which causes the resulting loan-to-value ratio to exceed the loan-to-value ratio at the time of loan origination.

(C)

Extend the term of the loan up to, but not exceeding, 40 years.

(5)

Changes in the rate of interest on the loan shall reflect the movement, in reference to the date of the original loan, of a periodically published index selected by the lender which may be either of the following:

(A)

The contract interest rate on the purchase of previously occupied homes in the most recent monthly national average mortgage rate index for all major lenders published periodically by the Federal Home Loan Bank Board.

(B)

The weighted average cost of funds for California Associations of the Eleventh District Savings and Loan Associations as published periodically by the Federal Home Loan Bank of San Francisco.

(6)

Any change in the interest rate shall not exceed the limit, specified by the lender in the loan contract, for rate increases in any semiannual period and shall not exceed the limit, specified by the lender in the loan contract, for rate increases greater than the base index rate.

(7)

Notwithstanding any change in the interest rate indicated by a movement of the index, increases in the interest rate shall be optional with the lender, while decreases are mandatory. Such decreases, upon the option of the borrower, shall be used (1) to pay off any negative amortization accrued when the interest rate was increased, or (2) to decrease the monthly payment as reflected in the decrease in the interest rate.

(8)

The borrower is permitted to prepay the loan in whole or in part without a prepayment charge at any time, and no fee or other charge may be required by the lender of the borrower as a result of any change in the interest rate or the exercise of any option or election extended to the borrower pursuant to this section.

(9)

The borrower, after initiation of the loan, shall not be subsequently required to demonstrate his or her qualification for the loan, except that this paragraph shall not limit any remedy available to the lender by law for default or other breach of contract.

(10)

In the event the remaining principal due on a loan made pursuant to this section will not be paid off during the current term, within 90 days of expiration of the term a borrower may elect in writing to repay the remaining balance in full or in substantially equal installments of principal and interest over an additional period not to exceed 10 years, during which period the interest rate shall remain fixed.

(c)

An applicant for a loan originated pursuant to the provisions of this section must be given, at the time he or she requests an application, a disclosure notice in the following form:
NOTICE TO BORROWER
IMPORTANT INFORMATION ABOUT THE ADJUSTABLE-PAYMENT, ADJUSTABLE-RATE LOAN
PLEASE READ CAREFULLY
(at least 10-point bold type)
You have received an application form for an adjustable-payment, adjustable-rate mortgage loan. This loan may differ from other mortgages with which you are familiar.
I. GENERAL DESCRIPTION OF ADJUSTABLE-PAYMENT, ADJUSTABLE-RATE LOAN
The adjustable-payment, adjustable-rate mortgage loan is a flexible loan instrument. This means that the interest, monthly payment and/or the length of the loan may be changed during the course of the loan contract.
The first flexible feature of this loan is the interest rate. The interest rate on the loan may be changed by the lender every six months. Changes in the interest rate must reflect the movement of an index that is selected by the lender. Changes in the interest rate may result in increases or decreases in your monthly payment, in the outstanding principal loan balance, in the loan term, or in all three.
The lender is required by law to limit the amount that the interest can change at any one time or over the life of the loan. The law does not specify what these limits are. That is a matter you should negotiate with the lender.
You may also want to make inquiries concerning the lending terms offered by other lenders on adjustable-payment, adjustable-rate mortgage loans to compare the terms and conditions.
Another flexible feature of the adjustable-payment, adjustable-rate mortgage loan is the monthly payment. The amount of the monthly payment may be increased or decreased by the lender every six months to reflect the changes in the interest rate. State law prohibits the lender from increasing your monthly payment by more than 7.5 percent per year. There may be circumstances, however, in which you, the borrower, may want to increase the amount of your monthly payment beyond the 7.5 percent limit. This option would be available to you whenever changes in the interest rate threaten to increase the outstanding principal loan balance on the loan.
A third flexible feature of the adjustable-payment, adjustable-rate mortgage loan is that the outstanding principal loan balance (the total amount you owe) may be increased from time to time. This situation, called “negative amortization,” can occur when rising interest rates make the monthly payment too small to cover the interest due on the loan. The difference between the monthly payment and the actual amount due in interest is added to the outstanding loan balance.
Under the terms of this mortgage, you as a borrower would always have the option of either incurring additions to the amount you owe on the loan or voluntarily increasing your monthly payments beyond the 7.5 percent annual limit to an amount needed to pay off the rising interest costs.
Continual increases in the outstanding loan balance may cause a situation in which the loan balance is not entirely paid off at the end of the 30-year loan term. If this occurs, you may elect in writing to repay the outstanding principal all at once, or with a series of fixed payments at a fixed rate of interest for up to 10 years.
The final flexible feature of the adjustable-payment, adjustable-rate mortgage loan is that you may lengthen the loan term from 30 to up to 40 years. Extending the loan term will lower your monthly payment slightly less than they would have been had the loan term not been extended.
II. INDEX
Adjustments to the interest rate of an adjustable-payment, adjustable-rate mortgage loan must correspond directly to the movement of an index which is selected, but not controlled, by the lender. Any adjustments to the interest rate are subject to limitations provided in the loan contract.
If the index moves down, the lender must reduce the interest rate by at least the decrease in the index. If the index moves up, the lender has the right to increase the interest rate by that amount. Although making such an increase is optional by the lender, you should be aware that the lender has this right and may be contractually obligated to exercise it.
The index used is [Name and description of index to be used for applicant’s loan, initial index value (if known) and date of initial index value, a source or sources where the index may be readily obtained by the borrower, and the high and low index rates during the previous calendar year].
III. KEY PROVISIONS OF [Name of Institution]
ADJUSTABLE-PAYMENT, ADJUSTABLE-RATE MORTGAGE LOAN
The following information is a summary of the basic terms on the mortgage loan being offered to you. This summary is intended for reference purposes only. Important information relating specifically to your loan will be contained in the loan agreement.
[Provide a summary of basic terms of the loan, including the loan term, the frequency of rate changes, the frequency of payment changes, the maximum rate change at any one time, the maximum rate change over the life of the loan, the maximum annual payment change, and whether additions to the principal loan balance are possible, in the following format:]
LOAN TERM
FREQUENCY OF RATE CHANGES
FREQUENCY OF PAYMENT CHANGES
IV. HOW YOUR ADJUSTABLE-PAYMENT, ADJUSTABLE-RATE MORTGAGE LOAN WOULD WORK
A. INITIAL INTEREST RATE
The initial interest rate offered by [Name of Institution] on your adjustable-payment, adjustable-rate mortgage loan will be established and disclosed to you on [commitment date, etc.] based on market conditions at that time.
[Insert a short description of each of the key provisions of the loan to be offered to the borrower, using headings where appropriate.]
B. NOTICE OF PAYMENT ADJUSTMENTS
[Name of Institution] will send you notice of an adjustment to the payment amount at least 60 days before it becomes effective. [Describe what information the notice will contain.]
C. PREPAYMENT PENALTY
You may prepay your adjustable-payment, adjustable-rate mortgage in whole or in part without penalty at any time during the term of the loan.
D. FEES
You will be charged fees by [Name of Institution] and by other persons in connection with the origination of your loan. The association will give you an estimate of these fees after receiving your loan application. However, you will not be charged any costs of fees in connection with any regularly scheduled adjustment to the interest rate, the payment, the outstanding principal loan balance, or the loan term.
V. EXAMPLE OF OPERATION OF YOUR ADJUSTABLE-PAYMENT, ADJUSTABLE-RATE MORTGAGE LOAN
[Set out an example of the operation of the mortgage loan, including the use of a table. In at least one of the examples, create a situation showing how negative amortization could occur.]

(d)

At least 60 days prior to the due date of a monthly installment to be revised due to a change in the interest rate, notice shall be mailed to the borrower of the following:

(1)

The base index.

(2)

The most recently published index at the date of the change in the rate.

(3)

The interest rate in effect as a result of the change.

(4)

The amount of the unpaid principal balance.

(5)

If the interest scheduled to be paid on the due date exceeds the amount of the installment, a statement to that effect, including the amount of excess and extent of borrower options as described in paragraph (4) of subdivision (b).

(6)

The amount of the revised monthly installment.

(7)

The borrower’s right to prepayment under paragraph (8) of subdivision (b).

(8)

The address and telephone number of the office of the lender to which inquiries may be made.

(e)

As used in this section:

(1)

“Base index” means the last published index at the date of the note.

(2)

“Base index rate” means the interest rate initially applicable to the loan as specified in the note.

(3)

“Graduated Payment Adjustable Mortgage Loan” means a loan on which the monthly payments begin at a level lower than that necessary to pay off the remaining principal balance over an amortization period of not less than 30 years. During a period the length of which is fixed at loan origination (the “graduation period”), the scheduled payments gradually rise to a level sufficient to pay off the remaining principal balance over the stipulated amortization period. Limitations on the rate of increase in the scheduled payments due both to graduation and to changes in the interest rate are also fixed at loan origination.

(4)

“Note” means the note or other loan contract evidencing an adjustable-payment, adjustable-rate mortgage loan.

Source: Section 1916.7, https://leginfo.­legislature.­ca.­gov/faces/codes_displaySection.­xhtml?lawCode=CIV§ionNum=1916.­7.­ (accessed May 10, 2025).

Last Updated

May 10, 2025

§ 1916.7’s source at ca​.gov