(a) Sections 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
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