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The Devil in the Details of Governor Schwarzenegger’s Mortgage Reform and Foreclosure Relief Proposal
By Ted W. Lieu
Chair
California State Assembly Rules Committee
Yesterday the Governor unveiled specific language for his proposals on Mortgage Reform and Foreclosure Relief. The proposals take a step forward to reform the dysfunctional mortgage system that led to this economic crisis, and to help keep people in their homes. More, however, needs to be done. Here are some of my initial reactions.
On mortgage reform, I commend the Governor for putting back part of AB 1830, a comprehensive bill that sought to ban predatory practices and unsuitable, exotic loan products in the subprime market. I am pleased the Governor included many of the mortgage broker duties outlined in AB 1830 and has expanded AB 1830’s ban on steering to cover not just subprime loans, but all loans. The Governor, however, failed to include several other critical elements, including a ban on negative amortization loans, caps on prepayment penalties, and a private right of action with attorney’s fees.
I am also pleased the Governor added in a new section that requires all borrowers who take out a subprime loan to be counseled by a HUD-approved housing counseling agency to ensure the borrower understands and accepts the terms of the loan prior to the lender drawing the loan documents. Giving counseling and financial literacy to subprime borrowers prior to locking them into a mortgage loan is an extremely effective defense against predatory lending.
On foreclosure relief, I am heartened the Governor has embraced the FDIC’s proposed solution of having lenders engage in loan modifications rather than foreclosures. Encouraging loan modifications where the borrowers pay 38% of their income to mortgage debt is a fair way to help protect lenders and keep the borrowers in their homes. The 90 day moratorium also provides time for loan modifications to occur.
The most encouraging aspect of today’s proposals, however, is the recognition that the deregulation policies advocated by the mortgage industry have failed us, and that state chartered banks and mortgage brokers need to be held to higher standards.
I look forward to working with the Governor and members of the legislature to craft a package that will help keep people in their homes and ensure a crisis of this magnitude never happens again.
Ted W. Lieu represents the 53rd Assembly District. Prior to being elevated to serve as Chair of the Assembly Rules Committee, he served as Chair of the Assembly Banking and Finance Committee. He has been the author of a number of bills dealing with mortgages and problems with subprime loans, including AB 1830 which was vetoed in September by the Governor.
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