The mortgage meltdown has had a ripple effect with respect to the
rest of the economy, and no one has remained untouched by the problems
it has created. The mortgage reform bill AB 1830 will put necessary
protections in place for borrowers in order to prevent another mortgage
crisis.
Thanks to the leadership of Speaker Karen Bass, Assemblymember Ted
Lieu, and President Pro Tem Don Perata, the centerpiece bill of the
mortgage reform package, AB 1830 (Lieu), was revived from a completely
gutted state. It now represents the most significant mortgage reform
to come out of the state legislature.
Home foreclosures are setting new records every quarter and wreaking
havoc on state, national, and international markets. AB 1830 is an
opportunity for Governor Schwarzenegger to lay the foundation of a
strong, stable housing market in California, and prevent the next
mortgage meltdown.
The next step for AB 1830 is a concurrence vote in the Assembly,
which is not expected to be contentious. From there the governor will
have an opportunity to show his commitment to preventing another
collapse.
AB 1830 takes the following steps to reform the mortgage industry, and protect borrowers in the future:
-
Requires Brokers To Act In Their Clients’ Best Interest: Most
borrowers reasonably, but wrongly assume that their broker will always
act to get them the best loan. Although many mortgage brokers do,
financial incentives and conflicts of interest have led to widespread
abuses, including aggressive marketing of unsuitable loans, deceptive
sales practices, and, steering of borrowers to unfavorable loans. AB
1830 codifies that for all home loans, brokers are the fiduciary of the
borrower who must put the borrower’s economic interests ahead of their
own, and gives borrowers the ability to enforce this fiduciary duty.
-
Prohibits Broker Steering: Brokers in the subprime market have steered
borrowers into risky loans that are inappropriate and/or have high
interest rates or less favorable features than loans for which the
borrowers qualify. AB 1830 prohibits mortgage brokers from such
steering.
- Caps Prepayment Penalties: Prepayment penalties
– the “exit tax” that subprime borrowers often have to pay for
refinancing or otherwise paying off a loan early – have served to trap
families in bad loans and strip home equity. Recently announced
federal Regulation Z bans prepayment penalties from higher priced loans
that adjust in the first four years, and limits penalties to two years
in length for other higher priced loans. AB 1830 incorporates these
provisions into California law, and also caps the amount of the penalty
where allowed to a 2% fee in the first year and 1% in the second year.
-
Strong and Effective Enforcement: AB 1830 allows harmed borrowers to
enforce violations of the law and pursue relief, and permits prevailing
borrowers to recoup attorney fees and costs. In addition, the bill
empowers State regulatory agencies and the Attorney General to enforce
the provisions of state and federal law.
The balancing act is
between protecting home buyers, home owners, and the rest of the
economy from another meltdown while ensuring that potential borrowers
still have the opportunity to realize the American dream of owning a
home. AB 1830 is an excellent first step towards ensuring that
California is protected from another mortgage collapse while still
allowing the market to flourish.
