Section 7106 - Avoidance of Unsafe and Unsound Business Practices(a) It is the strong intent of the Act and regulations that financial institutions should be making every effort to find and make sound loans in low loan volume areas, and compliance with the Act and regulations will be viewed in this light. The Act and these regulations should be interpreted to prohibit the use of unfounded and unsubstantiated assumptions regarding the effect upon loan risk of the physical or economic characteristics of a neighborhood or geographic area. A properly prepared appraisal using the market data approach will adequately reflect neighborhood characteristics affecting the subject property.(b) Pursuant to Section 35810 of the Act, consideration of conditions, characteristics or trends in the neighborhood or geographic area surrounding the housing accommodation shall be deemed to be required to avoid an unsafe and unsound business practice only in accordance with one or more of the following provisions of this Section: (1) If a financial institution can document that one or more factors relating to the geographic area closely surrounding the security property are likely to cause the fair market value of the security property to decrease during the early years (three to five years) of the mortgage term, even assuming the availability of nondiscriminatory financing in a geographic area, then the financial institution, in determining whether and under what terms and conditions to grant financial assistance, may make adjustments or additional requirements in the loan terms. Provided, however, that no adjustment or additional requirement made pursuant to this subsection shall exceed the minimum reasonably estimated to be required for the security property to continue to be an adequate security for the loan.(2) Natural or Other Hazardous Conditions. A financial institution may consider such hazards surrounding the security property to the extent demonstrably required to avoid an unsafe or unsound business practice.(c) Nothing herein shall preclude a financial institution from considering the properly appraised fair market value of the property which will secure the proposed loan.(f) As a general rule, zoning, including zoning which designates the security property as a non-conforming use, will be reflected in the appraised value of the property. However, insofar as a pending or recent zoning change may affect the short-term value of the security property (i.e., three to five years), it may be a valid reason for altering the terms of the loan or denying the loan as described in Section 7106. This issue should be approached with caution however. The fact that a housing accommodation is located on or near land zoned industrial or commercial will not in itself be an adequate basis for the denial of the loan. In many instances the location of a housing accommodation in or near a commercial zone may increase its fair market value. However, in cases where the financial institution is reasonably assured that a building permit would not be issued in the event of a casualty loss, due to zoning, the financial institution may be justified in denying the loan. Similarly, the fact that a housing accommodation is located on or near land zoned agricultural or is located in a remote rural area will not in itself be an adequate basis for the denial of a loan. The impact of these factors should be taken into consideration in the appraisal report in the estimation of fair market value and in comments regarding the neighborhood or geographic area surrounding the subject property.Cal. Code Regs. Tit. 21, § 7106
1. Order of Repeal of subsections (d) and (e) filed 6-3-85 by OAL pursuant to Government Code section 11349.7; effective thirtieth day thereafter (Register 85, No. 26). Note: Authority cited: Section 35814, Health and Safety Code. Reference: Sections 35810- 35815, Health and Safety Code.
1. Order of Repeal of subsections (d) and (e) filed 6-3-85 by OAL pursuant to Government Code Section 11349.7; effective thirtieth day thereafter (Register 85, No. 26).