(a) No increase in interest provided for in any provision for a variable interest rate contained in a security document, or evidence of debt issued in connection therewith, by a lender other than a supervised financial organization is valid unless that provision is set forth in the security document, and in any evidence of debt issued in connection therewith, and the document or documents contain the following provisions:
(1) A requirement that when an increase in the interest rate is required or permitted by a movement in a particular direction of a prescribed standard an identical decrease is required in the interest rate by a movement in the opposite direction of the prescribed standard.
(2) The rate of interest shall not change more often than once during any semiannual period, and at least six months shall elapse between any two changes.
(3) The change in the interest rate shall not exceed one-fourth of 1 percent in any semiannual period, and shall not result in a rate more than 2.5 percentage points greater than the rate for the first loan payment due after the closing of the loan.
(4) The rate of interest shall not change during the first semiannual period.
(5) The borrower is permitted to prepay the loan in whole or in part without a prepayment charge within 90 days of notification of any increase in the rate of interest.
(6) A statement attached to the security document and to any evidence of debt issued in connection therewith printed or written in a size equal to at least 10-point boldface type, consisting of the following language:
NOTICE TO BORROWER: THIS DOCUMENT CONTAINS PROVISIONS FOR A VARIABLE INTEREST RATE.
(b)(1) This section shall be applicable only to a mortgage contract, deed of trust, real estate sales contract, or any note or negotiable instrument issued in connection therewith, when its purpose is to finance the purchase or construction of real property containing four or fewer residential units or on which four or fewer residential units are to be constructed.
(2) This section does not apply to unamortized construction loans with an original term of two years or less or to loans made for the purpose of the purchase or construction of improvements to existing residential dwellings.
(c) Regulations setting forth the prescribed standard upon which variations in the interest rate shall be based may be adopted by the Commissioner of Financial Institutions with respect to savings associations and by the Insurance Commissioner with respect to insurers. Regulations adopted by the Commissioner of Financial Institutions shall apply to all loans made by savings associations pursuant to this section prior to January 1, 1990.
(d) As used in this section:
(1) “Supervised financial organization” means a state or federally regulated bank, savings association, savings bank, or credit union, or state regulated industrial loan company, a licensed finance lender under the California Finance Lenders Law, a licensed residential mortgage lender under the California Residential Mortgage Lending Act, 2 or holding company, affiliate, or subsidiary thereof, or institution of the Farm Credit System, as specified in 12 U.S.C. Sec. 2002 .
(2) “Insurer” includes, but is not limited to, a nonadmitted insurance company.
(3) “Semiannual period” means each of the successive periods of six calendar months commencing with the first day of the calendar month in which the instrument creating the obligation is dated.
(4) “Security document” means a mortgage contract, deed of trust, or real estate sales contract.
(5) “Evidence of debt” means a note or negotiable instrument.
(e) This section is applicable only to instruments executed on and after the effective date of this section.
(f) This section does not apply to nonprofit public corporations.
(g) This section is not intended to apply to a loan made where the rate of interest provided for is less than the then current market rate for a similar loan in order to accommodate the borrower because of a special relationship, including, but not limited to, an employment or business relationship, of the borrower with the lender or with a customer of the lender and the sole increase in interest provided for with respect to the loan will result only by reason of the termination of that relationship or upon the sale, deed, or transfer of the property securing the loan to a person not having that relationship.
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