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Schwarzenegger urged to sign mortgage reforms

Thursday, September 25, 2008

Consumers Union Urges Governor Schwarzenegger
to Sign Mortgage Lending Reform Measure (AB 1830)

Bill Aims to Ensure Californians Are Protected From Abusive Mortgage
Lending Practices That Contributed to Record Number of Foreclosures

Consumers Union urged Governor Arnold Schwarzenegger today to sign AB 1830, a bill that would help ensure that Californians aren’t unfairly steered into high-priced, subprime mortgages that can put them at risk of foreclosure. The bill, sponsored by Assembly member Ted Lieu, is supported by a broad coalition of consumer and labor organizations.
“AB 1830 provides much needed protections to address some of the serious failures in the higher priced mortgage lending market, which contributed to today’s foreclosure crisis,” said Norma Garcia, Senior Attorney for Consumers Union. “While more work needs to be done to rein in abusive mortgage lending practices, this measure helps protect the public from the dire economic and social consequences of California’s continuing foreclosure crisis.”
An unprecedented number of California homeowners have lost or are predicted to lose their homes in foreclosure. According to Realtytrac.com, California is the top foreclosure state in the nation. In 2008 alone, there have been 337,861 new foreclosure filings with 188,128 homes sold in foreclosure. Many homeowners have been steered toward higher priced subprime mortgages, even though they qualified for more affordable loans.
AB 1830 protects Californians in several meaningful ways:
• Holds brokers to a fiduciary duty to put a borrower’s interest first, regardless of whether the broker is acting as an agent for any other party in connection with the loan transaction.
• Prohibits brokers from steering borrowers to more costly or disadvantageous loans so that borrowers get the best loan for which they qualify, not one that is more expensive because it returns a higher commission to the broker.
• Eliminates compensation incentives that can lead to steering.
• Bans higher priced negative amortization loans, except for the purposes of a loan modification.
• Places caps on the amount of pre-payment penalties that can be charged to the borrower for paying off a loan early. Under AB 1830, a borrower cannot be charged more than 2% of the principle balance prepaid during the first 12 months, or 1% of the principle balance of the loan during the second year.
• Prohibits brokers from making false or misleading statements regarding higher priced loans.
While AB 1830 provides several important protections for consumers, it leaves other critical issues unaddressed. Rather than banning the payment of yield spread premiums to brokers and prepayment penalty assessments on borrowers, AB 1830 allows the practices but limits their application. AB 1830 does not address how to protect borrowers when loans are negotiated in a language other than English but the loan documents are presented only in English. Finally, AB 1830 does not hold assignees and investors liable for financing illegal loans.
“On balance, AB 1830 represents a significant step towards promoting common-sense lending practices that benefit the public interest,” said Garcia. “Governor Schwarzenegger should sign these reforms into law to help ensure that Californians can secure more affordable mortgages and avoid the risk of foreclosure.”
Norma Garcia – 415-431-6747