Major Subprime Lending Reform for California Passed by State Assembly

[courtesy of California Progress Report]

By Frank D. Russo

The California State Assembly yesterday passed a package of three bills, almost exclusively with the votes of Democratic members, that are being hailed as the most comprehensive and far reaching state legislation dealing with mortgage and lending reform in the country.

AB 1830 by Assemblymember Ted Lieu (pictured above presenting the bill) is the centerpiece of Assembly Democrats to address the mortgage crisis that has led to hundreds of thousands of foreclosures, tightened credit markets internationally, and contributed heavily to the State budget deficit.

It will make sweeping changes to the mortgage industry, all of which shared some part in causing the current mortgage meltdown. AB 1830 would eliminate certain bonuses for mortgage brokers who steer customers into high-risk loans, as well as require lenders to qualify borrowers based on their ability to pay over the life of the loan, not just the initial “teaser” rate. This bill would also ban types of risky practices, such as offering negative amortization loans and prepayment penalties, which have stopped many borrowers from refinancing risky loans.

Lieu, who chaired the Assembly Banking Committee earlier in this session, and who is now the Chair of the Assembly Rules Committee, has met with Federal Reserve Board Chair Ben Bernanke in Washington, D.C. Yesterday’s vote, 47 to 26, with 5 Republicans joining Democrats in support and all dissenting votes coming from Republicans, was the culmination of months of hard work and negotiations with a wide range of consumer groups which support the bill and the mortgage industry. AB 1830, which is titled “The Subprime Lending Reform Act of 2008,” is co-authored by 37 members of the Assembly, including Assembly Speaker Karen Bass and Speaker Emeritus Fabian Nunez. It is supported by the Greenlining Institute, the California Reinvestment Coalition and the Center for Responsible Lending.

Lieu opened debate with an eloquent plea for the bill on the Assembly floor, stating:

“The subprime mortgage market turmoil has become a perfect storm of less than adequate regulatory oversight, loose underwriting standards and a severe lack of basic financial literacy. From the urban centers of California, to the inland empire, to the central valley, all of our communities are suffering from this crisis. Foreclosures debilitate our local governments and destabilize our communities.

“The statistics are sobering. According to RealtyTrac, in January 2008 foreclosures were up over 454% compared to the same period in 2007. In February 2008, California had over 53,000 foreclosure filings, the most of any state. In addition, approximately a fifth of subprime mortgages are estimated to be at risk of default. With falling home prices, it is estimated that 20 million Americans will have negative equity in their homes.