Legislature Passes Mortgage Reform Bill

Contains important reforms, but omits critical pieces

OAKLAND, Calif., Aug. 27 /PRNewswire-USNewswire/ -- AB 1830, the
California legislature's strongest piece of legislation designed to rein in
the abuses in the mortgage market, passed the Senate today with a 21-16 vote.
It must go back to the Assembly for concurrence before being sent to the
governor.
"The California Legislature has approved a bill with important, though
limited, reforms this year," said Paul Leonard, director of the California
office of the Center for Responsible Lending. "While it doesn't do everything
needed to protect consumers going forward, it represents a positive step to
help California borrowers and mortgage markets. Now the ball is in Gov.
Schwarzenegger's court."
"This is the most important mortgage market reform bill the Legislature
has sent to the governor," Leonard continued. "His signature on this modest
bill should be a slam dunk."
The governor's efforts to date have focused on helping borrowers and
communities avoid the negative consequences of foreclosure rather than
tightening lending regulations. Gov. Schwarzenegger announced an agreement
with loan servicers last November which has had limited success in stemming
the rising tide of foreclosures. The governor also announced a new program in
July to help first-time homebuyers purchase foreclosed properties with
favorable terms. These initiatives, however, address only the consequences of
excessively risky lending, but do nothing to fix regulatory framework of the
mortgage marketplace.
AB 1830 includes key reforms, such as establishing that for all home
loans, brokers have a fiduciary duty to their clients and must put the
borrower's economic interests ahead of their own. Brokers are also prohibited
from steering borrowers to loans that are more costly than what the borrower
would qualify for. AB 1830 also adds to recent federal regulations by capping
the size of prepayment penalties, the expensive exit fee that traps borrowers
in subprime loans.
"The new broker duties should help ensure that California mortgage brokers
are looking out for the best loans for borrowers, not with fattening their
wallets," Leonard added.
The version of AB 1830 approved today, sponsored by Assembly Member Ted
Lieu (D-Torrance) and Speaker Karen Bass (D-Los Angeles), takes California a
step in the right direction. But it pales in comparison to the earlier reform
package passed by the Assembly in May, and to state mortgage reforms in less
heavily impacted states like New York, Connecticut, North Carolina and
Minnesota.
The bill was significantly weakened through the legislative process,
removing a number of features designed to correct market failures and protect
consumers. Key elements like codifying basic underwriting standards for non-
traditional (Alt-A) loans, banning the use of abusive yield-spread premiums
and prepayment penalties; requiring translation of key mortgage terms for non-
English speakers; instituting bonding requirements for mortgage brokers and
recognizing greater accountability for secondary market purchasers fell off of
the legislative radar.
While critical, the measures in AB 1830 do not go far enough to correct
the systemic problems of the mortgage market that have brought California and
the nation unprecedented foreclosures.
"We hope the Legislature and governor will move next year to finish the
job of making the subprime and nontraditional mortgage markets safe for
borrowers."
SOURCE Center for Responsible Lending

Ginna Green of Center for Responsible Lending, +1-510-379-5513,
+1-510-219-9695, ginna.green@responsiblelending.org