Predatory lending measure clears Assembly

California Assemblyman Ted Lieu, the Torrance Democrat who is running for attorney general, has moved an anti-predatory home lending law through the Assembly -- for a second time.

The measure now heads for the state Senate. Lieu, the former head of the Assembly Banking Committee, wrote a similar measure last year that barely made it through the more moderate Senate.

But when the Legislature sent it to Gov. Arnold Schwarzenegger, he refused to sign it, saying it was well intentioned but would create an uneven playing field because it would not apply to federally regulated entities.

Schwarzenegger supported at least one one provision of last year's bill, which imposed a 120-day moratorium on foreclosures in the state, and signed it into law as a separate measure.

Lieu's proposed law seeks to create a stronger fiduciary duty for California mortgage brokers, meaning they would have to do a better job of putting the interests of borrowers first. To encourage this, it would ban payments from lenders to brokers who bring in loans at higher rates that the borrowers qualify for. 

These payments, known as yield spread premiums, are now rarely seen in the wake of the mortgage meltdown. Brokers said the payments enabled them to defray the closing costs of the loans by using them to cover appraisals and the rest of the incredible array of junk fees that always seem to appear at closing time.      

Consumer advocates contended that certain brokers tended to pocket the bonuses and stick borrowers in unaffordable adjustable-rate loans. 

Lieu's bill, AB 260, expressly prohibits steering of clients into inferior loans, bars brokers and lenders from making deceptive statements about subprime mortgages and limits the use of prepayment penalties. It also would ban negative amortization loans -- the what, me-worry? mortgages where you can pay so little that the mortgage balance goes up.

Federal regulators and legislators also have been tightening restrictions on the mortgage industry, and buyers have evaporated for the easy-money loans that fed the big boom earlier this decade. So it's hard to say what immediate effects Lieu's proposals would have should they become law. In a phone call this afternoon, he told me that one difference in his proposed law compared to federal actions would be to allow private parties to hire lawyers and prosecute on behalf of the state, recovering attorney fees if they win. Critics of the plaintiff's bar are sure to love that. 

Lieu also said that banks and their trade groups have so far stayed neutral on his proposals. That is interesting given the brutal battles that banks and the Office of the Comptroller of the Currency -- the Treasury Department agency that regulates national banks -- have fought (and won) in the past to assure that state lending laws can't be enforced against national banks.

His proposals mostly apply to independent mortgage brokers, who are regulated by the state, not the federal government. The brokers work with multiple lenders, theoretically helping borrowers find the loan best suited to their needs. Lieu's measure would give the state AG the power to revoke state licenses for violations and impose a $10,000 fine per violation.

A Schwarzenegger press assistant, Rachel Cameron, said the governor won't discuss a proposed law until it hits his desk. Cameron did volunteer to send me a list of the governor's past efforts to help troubled homeowners. Since this post is already way too long, I will be happy to e-mail the list, along with his previous statement on the flaws in Lieu's law, to anyone who wants to review it. Requests should be sent to scott.reckard@latimes.com 

 -- E. Scott Reckard
                         

Comments

[Nick]

As described, this seems surprisingly reasonable, especially coming from a Democrat (the party who's recent housing market related propositions seem to be all variations of either interfering in the free market, harming the lending industry, interfering in private contracts, or giving payouts to sellers). The part about letting private parties sue for damages is a disaster in the making, of course, but it's not like any political proposal isn't going to have a few hopelessly idiotic politically motivated addendum's... hopefully some rational person can take the initial bill, and make something which wouldn't be quite so destructive out of it, at which point it might be eminently reasonable. At least he's not proposing another absolutely brainless and counter-productive moratorium on increasing housing affordability or anything.

[Spencer]

Five states (Georgia, New York, New Jersey, New Mexico and Nevada) tried to pass a law like this in 2003. But the Bush Administration using the Office of Currency Controller stepped in and declared the effort to stop predatory lending illegal. This entire debacle could have been prevented.

[X- Broker]

The people who write these laws do not understand the Mortgage industry. This is a classic example of Dis-intermediation. This will only hurt consumers in the long run by pushing up rates. Ultimately this will eliminate competition and give the Big Banks a monopoly on lending. Which will in turn allow them to raise rates to make more money. Believe it or not the proliferation of Brokers actually drove rates down because of competition.If a Borrower has many options than the Broker offering the loan needs to be more competitve. Simple Supply Side Economics. Any consumer who is smart enough to buy a house should be smart enough to figure out what kind of loan they are agreeing to. If they don;t like the terms of the loan - then don't sign the paperwork. It was often the consumer begging for the cheapest payment and lowest rate that fuled the lending craze. People wanted to buy bigger and bigger houses that they could not afford because they were greedy and thought they would make a fast buck. Everyone invested in Real Estate because they thought it was No Brainer money maker. Many of those people had no business buying a house. However they begged and begged for loan approavls and the lowest rate until the market gave them what they wanted. It is a vicous circle. Where there is a demand the market will feed it. I am so sick and tired of Brokers being the blame for the housing mess. It was the banks that offered the products and approved the loans. It was the home buyer / Consumer that demanded aggressive financing so that they could buy a house that they could not afford. Now the counsumer claims ingnorance. I call B.S. They knew all along they were getting in way over their head. However they did it to make a fast buck. Everyone was trying to flip houses and keep cashing out. China fuled the craze by buying our Bonds. Wall Street encouraged Banks to make risky loans because they could package them and unload them on unsuspecting investors. The ratings agencies like Moodys played a hand because they gave all of these JUNK investments AA grades. Everyone is culpable. Not just the Brokers. The Brokers are merely a scapegoat because society is unwilling to take responsibilty for their mistakes. And if you want to know the REAL cause of the housing fiasco... it was cheap money after 911 and the Community Re-Investemnt Act of 1977 that required banks to make loans as a percentage of the portfolio to minorities and the less fortunate. People who could not ordinarily qualify for a loan. The Federal Goverment Mandated that banks loan money to unqualified individuals.

[Renter]

I would happily pay higher interest rates in exchange for confidence that the people involved in my loan are not going to rip me off. As things currently stand, I intend to hire an attorney if I ever manage to buy a home. This sort of bill is exactly why we form governments in the first place.

PS Is the last poster German, or does he just like to capitalize Nouns for no apparent Reason?