California Assembly Passes Foreclosure Reform Bill But More Needed to Protect Future Borrowers from Predatory Loan Practices

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Legislation that would reform the foreclosure process in California for the benefit of homeowners trying to hold on to their homes passed the Assembly today on a 55 to 18 vote, just one vote above the two-thirds majority it required. Ten Republican Assemblymembers joined 45 of the 48 Democrats in voting for the bill, while all 18 votes against it came from Republicans.

The bill that passed, SB 1137 is authored by Democratic Senators Don Perata, Ellen Corbett, and Michael Machado, and coauthored by Speaker of the Assembly Karen Bass and principal coauthor Assemblymember Ted Lieu, who presented it on the Assembly floor. It goes beyond federal laws and received broad support from consumer groups. The legislation requires lenders and servicers to:

  1. contact borrowers (or engage in a prescribed process to do so) to schedule telephone or in-person meetings on restructuring options before beginning the foreclosure process,
  2. requires a 60-day notice to be given to tenants of buildings facing foreclosure before they can be removed from a rental housing unit; and
  3. allows fines of up to $1,000 a day for owners of foreclosed properties that fail to adequately maintain them.

“Foreclosures are afflicting thousands of Californians and their communities,” Perata said. “SB 1137 gives homeowners more advanced warning a foreclosure may be coming and provides the tools they need to help avoid it.”

Despite the fact that Perata’s bill has broad support and no known opposition, it was on call after the Assembly debate while the last votes were rounded up. All in all, 18 Republicans voted against the bill and another 4 failed to vote on it along with three Democrats who did not vote.

SB 1137 is an urgency measure that would take effect immediately when signed into law (though the provision requiring servicers to contact borrowers before starting the foreclosure process will have a 60-day implementation period before it goes into effect), and that is why it needed the two-thirds vote to pass. Credit Perata and others for working out a viable bill that has been able to make it this far and that will provide immediate relief. It now returns to the Senate for concurrence in amendments made in the Assembly, which is expected this week. It earlier had passed the Senate with just one vote to spare on a 28 to 10 vote, with all of the dissenting votes coming from Republican Senators.

And it needs to make it one more time over the two-thirds vote hurdle in the Senate and then, of course, to be signed by Governor Schwarzenegger.

While there was much jubilation amongst consumer groups and those who are working on predatory loan practices and solutions to the mortgage meltdown that has hit California more than any other state, there also was a recognition by Assemblymember Lieu, who chaired the Banking Committee earlier in the session and met with Federal Reserve Board Chair Ben Bernanke about the crisis, and those consumer groups that more needs to be done.

Earlier this session, the Assembly passed a number of bills that would have reined in abuses in the subprime market, including that would have limited prepayment penalties; required lenders to evaluate a borrower’s ability to repay; established mortgage brokers’ fiduciary duty to borrowers; regulated mortgage servicers; required lenders to provide translated summary of loan terms to non-English speaking borrowers and prohibited involuntary waivers of legal protections.

One week ago, the Senate Banking Committee gutted or killed all but one of those mortgage-related bills, with only AB 529 from Assemblymember Alberto Torrico (D-Fremont) making it out in its original form; his bill would require lenders to provide notice to borrowers regarding interest rate resets. AB 1830, sponsored by Assemblymember Ted Lieu (D-Torrance) and originally named the Subprime Lending Reform Act, was completely gutted and in its current version merely directs California legislators to enforce weak federal laws.

“This bill is an important step toward providing relief to borrowers in trouble right now, renters and communities facing increasing blight as a result of foreclosures,” said Paul Leonard, director of the California office of the Center for Responsible Lending, a research and advocacy organization dedicated to ending abusive financial practices, “but the next order of business should to be to restore the Assembly legislation that would also protect borrowers in the future.”

And Assemblymember Lieu, who fought hard yesterday to help pass SB 1137 has this to say:

“Senator Don Perata’s SB 1137 sends a strong message that the California State Legislature will go further than federal law to address the mortgage foreclosure crisis. Recently and unfortunately, the Senate Banking, Finance and Insurance committee killed a comprehensive package of Assembly mortgage reform bills based on industry’s argument that California should do nothing other than conform to federal law. SB 1137 is a clear and stunning rejection of the ultra-conservative industry argument that California has no role other than to follow the federal government. This bill shows we will lead, not just follow, and that relying on the same federal regulators that failed us during the mortgage crisis is not an option.

“California was the hardest hit and therefore needs to be at the forefront of creating such a comprehensive plan. Such states as New York and North Carolina have already passed comprehensive mortgage reform. It is time we do more.

“Again, I would like to commend Pro Tem Perata on his recognition that sensible mortgage reform requires California to go further than federal law. SB 1137 is a solid first step, but we certainly need to do more to address adequately the mortgage crisis. The Assembly already passed a solid package of comprehensive reforms to the Senate. The ball is now in the California Senate’s court.”

Ronald Coleman, policy director for California ACORN (the Association of Community Organizations for Reform Now)–the nation’s largest community organization of low- and moderate-income families, working together for social justice and stronger communities. Praised passage by the assembly, saying: “This bill provides much needed assistance to suffering families across California struggling to stay in their homes and helps tenants that are living in properties in foreclosure who are in danger of losing a place to live without notice.”

Pedro Morillas, legislative advocate for CalPIRG,an organization that has fought for this bill and other parts of the Assembly package that stalled in the Senate, said: “Opening communication between lenders and borrowers is important, but a truly preventative reform package is needed to keep the bad loans from being made in the first place,”

Norma P. Garcia, senior attorney for Consumers Union, the nonprofit publisher of Consumer Report, another organization that has weighed in on the subprime mortgage mess in California and the need for legislation, said: “By creating sensible stop-gap protections for borrowers before they lose their homes, SB 1137 will help preserve homeownership by preventing unnecessary home foreclosures from occurring, This is absolutely critical to help stem California’s avalanche of foreclosures, but we also need stronger laws to protect against future mortgage meltdowns because our economy cannot afford to walk down this road again.”

The bill’s passage comes on the heels of the California Attorney General’s lawsuit alleging unfair and deceptive practices on the part of Countrywide Financial, a leading lender in the subprime market.

“SB1137 will help stem the foreclosure tide in California,” said Kevin Stein, associate director of California Reinvestment Coalition. “At the same time, Attorney General Brown’s lawsuit against Countrywide underscores the need for the legislature to also put in place strong consumer protections to ban the kinds of abusive practices engaged in by Countrywide and other lenders, which have harmed so many families and fueled the current crisis.”

In early June, I wrote an article about “The Difficulties of Navigating Effective Legislation on the Subprime Mortgage Mess and Foreclosures Through the Gauntlet of the California Senate Banking Committee.”

The failure of the Assembly bills in the Senate has brought stinging rebukes by the Sacramento Bee in an editorial: Wake up and smell the foreclosures, senator–Banking committee members dither as their districts suffer mortgage on June 18. In it, the Bee noted:

“While the Assembly understands that and has passed a package of bills, senators on the banking committee have been overly cautious. They seem to think that the federal government can take care of California’s mess.

“Yet as the Office of the U.S. Comptroller of the Currency noted in a March 6 letter to the Washington Post, “The overwhelming majority of the subprime loans causing so many problems today, including the most predatory loans, were originated by state-regulated mortgage brokers and lenders.” The federal government, he continued, “doesn’t regulate those brokers and lenders; that’s the job of the states.” Are senators listening? “

The Los Angeles Times also minced no words on this, calling it a “meltdown” in the Senate in an editorial, saying:

“The state Assembly’s response to the sub-prime mortgage catastrophe experienced its own meltdown in the Senate Banking, Finance and Insurance Committee last week. In a twist on the cliche, only the weak bills survived. The most ambitious Assembly bill, AB 1830, was tamed in advance by sponsor Ted Lieu (D-Torrance) to answer some of the industry’s objections, yet even the less-restrictive version was gutted by the committee.

“The Assembly-passed bill would have, for sub-prime loans, banned prepayment penalties, which can lock borrowers into bad loans, and “yield spread premiums,” which reward mortgage brokers who persuade customers to accept higher interest rates. It also would have barred some exotic loans for sub-prime borrowers, including “liar loans” that are granted without verifying the borrower’s ability to repay. Finally, it would have prohibited lenders from refinancing loans unless there were tangible benefits for borrowers. These restrictions, aimed at widespread predatory lending practices, are already law in some states, and the Federal Deposit Insurance Corp. has called for similar strictures in new federal “truth in lending” rules.

With an anemic response from Washington and limited measures by the Schwarzenegger Administration so far, California needs to do more in the final months of the current legislative session. This is a good first step that will have immediate effects if signed by the Governor.

frankrusso.jpgBy Frank Russo, Publisher, The California Progress Report

Originally published on The California Progress Report. Republishd with permission.

Recent articles by Frank:

Published by the LA Progressive on July 1, 2008
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