The mortgage crisis hasn’t just led to a rising tide of high-profile foreclosures, such as California Congresswoman Laura Richardson’s Sacramento home. It has also resulted in a near-flood of mortgage industry-related bills making their way through the Legislature.

Beating the deadline for bills to emerge from their house of origin, a trio of Senate bills supported by the California Mortgage Bankers Association (CMBA) had made it out of the Senate. Several other bills the group opposed either died or were amended.
Sen. Mike Machado, D-Stockton, is the author of three major mortgage-related bills: SB 1053, SB 1054 and SB 1055. Machado managed to get both the mortgage industry and its critics onboard with the legislation, which will increase the disclosure requirements for lenders and protections afforded to borrowers.

But both sides admit that large-scale reform must come from Washington, D.C.—and that will probably have to wait for a new presidential administration.

“There is virtually nothing that the state can do that will go far enough because of federal preemption and the fact that it’s a national problem,” said Robert Gnaizda, policy director and general counsel for the watchdog group the Greenlining Institute. “The greatest focus has to be on Congress and the Federal Reserve.”

Meanwhile, the CMBA has moved closer to a compromise with the author of one of the main bills they still oppose, AB 1830. This bill from Assemblyman Ted Lieu, D-Torrance, would place significant new restrictions on lenders who offer subprime loans. This includes limits on penalties that can be levied against subprime borrowers—including a prohibition against prepayment penalties—and enacts new penalties on lenders who knowingly offer these loans to people they know can’t pay them.

Dustin Hobbs, communications director for the CMBA, said the bill as written would make it difficult for anyone to offer subprime loans in California and would bar many people from homeownership. He added that the subprime crisis has been somewhat overblown in the media, given that 78 percent of Californians who got subprime loans in 2005 and 2006 are still in their homes.
“We don’t want to go back to the days when you had to put 20 percent down,” Hobbs said.

Reached on Tuesday, Lieu said that his staff was still in talks with the CMBA and other groups, but had taken several amendments in order to make it more like an industry-supported bill passed in North Carolina last year. This includes language limiting the new rules to subprime loans and not other “non-standard” loan types.

The bill also picked up some penalties on dishonest and negligent brokers from AB 2880, a Lois Wolk bill that stalled in the Assembly Appropriations Committee. Wolk is now a co-author of AB 1830.

“We’re putting in a whole section on broker duties and responsibilities that industry does not have objecting to,” Lieu said, adding that he thinks “we’re getting closer” to have a bill that would be palatable to both sides.

Because most of the rules covering lenders are administered by the federal government—thus preempting state control over them—the pending legislation in California governs aspects of the industry where the state does have some control. This limited scope actually made it easier for the industry and its critics to agree on some needed reforms, Gnaizda said. None of Machado’s three bills faces serious institutional opposition.

“We’re absolutely for clarity in the industry,” Hobbs said. “I don’t even understand all of my mortgage documents.”
The trio of Machado bills each focus on a different aspect of the lender/borrower relationship. SB 1053 would greatly increase the tracking and disclosure requirements on mortgage brokers as a way of cutting down on fraud. SB 1054 would bar professionals who violate real estate laws from working in the field for three years, and also address several potential conflicts of interest. SB 1055 would offer tax relief to borrowers who’ve had debt forgiven by lenders, as a means of helping these borrowers afford to stay in their homes.

Machado said these bills came out of two years of talks and hearings, which started well before the mortgage crisis was in the daily news. He added that these reforms reflect the fact that the mortgage industry is now tied into a much larger international market for mortgage-backed securities.

“You have to make sure that what you do is not viewed as being capricious and arbitrary by the secondary market,” Machado said. He added that if the new regulations failed to do so, “the cost of liquidity is going to go up.”

The CMBA’s Hobbs also praised AB 1137 by Senate Leader Don Perata, D-Oakland, calling it “the right way to do disclosure.” This bill calls for new steps and communication between lenders and borrowers when the borrower is in danger of going into foreclosure.

But the real action is likely to come in Washington after the fall elections, Gnaizda said.

The Greenlining Institute will be meeting with Fed chair Ben Bernanke, the Federal Deposit Insurance Administration and several other agencies on Nov. 17 and 18. These meetings and other will hopefully lead to changes at the national level. In the meantime, Gnaizda said, he’s happy with what’s been happening in the California Legislature this year, even if his group didn’t get everything they wanted.

“Machado and Lieu have done the best they can,” Gnaizda said. “It may not be worth an all-out effort when the real fight is elsewhere.”