The Difficulties of Navigating Effective Legislation on the Subprime Mortgage Mess and Foreclosures Through the Gauntlet of the California Senate Banking Committee

“There have been a host of concerns raised by industry and staff about lender-specific public reporting. These concerns are misplaced, and reminiscent of the similarly misplaced concerns about other data reporting requirements imposed at both the Federal and state levels. The Federal Home Mortgage Disclosure Act (HMDA) sets a clear precedent for the feasibility and value of democratizing lender-specific lending data. This data has allowed for enhanced monitoring of lending to minority and other underserved communities, and has contributed to ever-growing investments by financial institutions under the Community Reinvestment Act. There is also California authority for publicizing entity-specific performance data, such as that collected on hospitals by the Office of Statewide Health Planning and Development.

“Moreover, even more detailed loss mitigation data is already reported in several other forums, including to investors in mortgage-backed securities, and under the federal Securities and Exchange Commission’s Regulation AB.2 Requiring lender-specific reporting through AB 69 would have ensured that the public, and not just investors and government agencies, have access to information to examine and compare the outcomes of lenders and servicers with respect to loss mitigation.

“In its original form, AB 69 had promised to hold lenders and servicers accountable for their public promises and rhetoric around foreclosure prevention. For example, in late November 2007, Gov. Schwarzenegger announced a landmark agreement with loan servicers to establish “fast-track” loan modification procedures that would allow borrowers to stay in their homes rather than face foreclosure. Lenders and servicers have made additional promises and representations regarding their loss mitigation efforts. As the author of AB 69, Ted Lieu indicated in a January 7, 2008 press release, “If these [loss mitigation] programs are what they’re supposed to be, the lenders should be proud to report this data and show what a good job they’re doing. If they’re not, we’re going to shinea light on them.” (emphasis added).

“It is clear, however, that voluntary efforts are falling short. There has been no lender-specific reporting on the outcomes produced by the servicers who participated in the Governor’s agreement. A recent article from the Sacramento Bee, reported that there were approximately twice as many foreclosures as loan modifications among those servicers who signed the Governor’s agreement. See Jim Wasserman “Schwarzenegger’s Subprime Accord Didn’t Cut Foreclosures,” Sacramento Bee, at D1 (May 22, 2008) (“Ten lenders and loan servicers that manage more than half the state’s subprime loans reported modifying about 24,000 loans during the first quarter of 2008,” while 49,000 borrowers lost their homes).

“Notwithstanding the shortcomings of the Department’s existing data reporting and disappointing results in averting foreclosures, AB 69 has been amended to remove the very features that would allow the public to hold mortgage servicers accountable for their efforts to keep borrowers in their homes.”

So the bill started out doing something about transparency and holding the industry to their promises and now is a mush that has abandoned its initial purpose. Why was it amended—without a public process? Who participated in those meetings? Did Lieu have to do this before the committee hearing to have any chance of moving the bill forward, and is it worth it?

This is not the only bill coming before the committee today that has been amended in the last week—and not to the benefit of the consumer. This second case in point is with AB 529 by Assemblymember Torrico that passed the Assembly with some modifications, but still accomplishing most of what it started out with. It requires notification by lenders of when rates are about to go up under an adjustable mortgage. It originally required three notices and was amended down to one notification. But with the amendments of May 28, now it is time limited—and does not apply to loans made after January 1, 2008—as if consumers don’t need to know when these newer loan rates are about to go up so they can look for alternatives to what often leads to foreclosures due to an inability to pay the new and higher rate. The logic of this one escapes me. You can get the gist of this by reading the committee analysis.

Legislators start with the best of intentions and the process then goes downhill from the enthusiasm of the first press conference to whatever little can make it into law. And it’s not as if this is some obscure or unimportant policy area. It’s killing this state in many ways and going to get worse. Talk about fiddling while Rome burns.