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
