The California legislature’s strongest statute designed to rein in abuses in the mortgage market (AB 1830), passed the state Senate yesterday with a 21-16 vote. The bill will go back to the state’s Assembly for concurrence before being sent to Governor Schwarzenegger.
According to Paul Leonard, director of the California office of the Center for Responsible Lending, the bill provides for important reform, but is limited in its scope and omits some critical steps of recovery. “While it doesn’t do everything needed to protect consumers going forward, it represents a positive step to help California borrowers and mortgage markets,” Leonard said. He expects the governor’s signing of the bill to 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. Governor Schwarzenegger announced an agreement with loan servicers last November which, according to the Center for Responsible Lending, 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 the consequences of risky lending, rather than the regulatory framework of the mortgage marketplace.

AB 1830 includes key reforms, such as postulating that 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 more costly loans for which they are unqualified. In addition, the bill adds to recent federal regulations by capping the size of prepayment penalties, the expensive exit fee that can trap borrowers in subprime loans.
The bill, however, was significantly weakened by 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.
The version of AB 1830 approved by the Senate yesterday was sponsored by Assembly Member Ted Lieu and Speaker Karen Bass.