California lawmakers approve foreclosure-protection law

A pile of clothes and a sofa sit outside a foreclosed home in Los Angeles, California, October 25, 2010.

SAN FRANCISCO (Reuters) - California legislators on Monday approved a sweeping bill aimed at stopping abusive practices by mortgage lenders and helping homeowners avoid foreclosure.

The legislation, among the most ambitious of its type in the nation, would bar banks from moving ahead with foreclosures while still negotiating with homeowners over loan modifications, a practice known as "dual-tracking."

It would also allow lawsuits against banks for so-called "robo-signing," in which foreclosure documents are signed en masse without review. Revelations about robo-signing helped lead to a $25 billion settlement of a multi-state foreclosure lawsuit against major banks.

California Attorney General Kamala Harris, a central player in the foreclosure lawsuit settlement, also played a lead role in developing the legislation approved Monday.

Governor Jerry Brown has not formally weighed in on the legislation, but he is expected to sign it in the coming days.

The California law, and others like it around the country, is opposed by banks, mortgage servicers and some real estate market professionals. They say that such legislation imposes unnecessary burdens on lenders and has the effect of delaying, rather than preventing, foreclosures. That, in turn, may impede the long-term recovery of the real estate market.

In response to such criticisms, the final legislation was amended so that it applies only to first mortgages, and only to homeowners who still occupy their residences, among other changes.

California is among the states hardest-hit by the housing meltdown. The city of Stockton last week became the largest municipality ever to file for bankruptcy, in part because of a devastating housing collapse that has given Stockton one of the highest foreclosure rates in the nation. (Reporting by Jonathan Weber; Editing by Lisa Shumaker)