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New CA Lending Bills Signed Into Law Do NOTHING To Alleviate Foreclosures

Posted October 13th, 2009 in Mortgage Loan Insights

Governor Arnold Schwarzenegger approved seven new laws on October 11th that provide a range of new so-called consumer protections to home mortgage holders in a last-minute scamper session.

Absolutely NOTHING in the new legislation will help homeowners currently facing foreclosure, which was what the Democrat-sponsored bills were supposed to alleviate.

Late Sunday night, the governor signed AB 260 by Assemblyman Ted Lieu (D-Torrance). The measure, which takes effect Jan. 1, tightens restrictions on mortgage brokers so they cannot steer borrowers to riskier, higher-interest loans when they qualify for less-expensive ones. While this may seem like something new, current lending law already makes it illegal for lenders to refinance borrowers unless there is a “clear and tangible net benefit to the borrower”. Brokers have long known that their loan submissions will be rejected unless a refinance at a higher interest rate provides a necessary and substantial benefit to the borrower, such as cash-out or to refinance an adjustable loan to a fixed rate. So nothing new here.

The new law also bans so-called negative-amortization loans, which offer the option of monthly payments so low that the loan amounts can actually grow over time. You’d have thought this would have been a no-brainer back in 2007, but now that no lender anywhere even offers a neg-am loan I guess it’s better to outlaw them now.

The law also limits prepayment penalties to no more than 2% of the loan balance and allows state regulators to enforce federal lending laws. Brokers are in favor of lower prepayment penalties. Lenders are not. The part about the state enforcing federal lending law is a joke. I can tell you that our elected officials can’t even tell you which loan fees are covered under current legislation as it pertains to high-cost lending per their own laws, much less be tasked with enforcing those of the fed (which in some cases are inconsistent with state regulations).

The governor vetoed similar legislation last year at the urging of some groups in the mortgage and real estate industries. Governor Schwarzenegger has a history of inexplicably shifting positions on key issues, kind of like how the wind blows.

The California Assn. of Mortgage Brokers, the California Mortgage Assn. and the California Assn. of Realtors unsuccessfully opposed this year’s version of the bill.

Lieu, the bill’s author, successfully argued that his proposal was needed more than ever to help California homeowners avoid foreclosure. Lieu noted that, according to RealtyTrac, a real estate data service, 92,326 homeowners were hit with foreclosure notices during August. Yet there’s literally NOTHING in this new legislation that actually addresses anything having to do with homeowners who are currently struggling to meet their monthly mortgage payments, or who have fallen behind and are not being relieved with loan modifications. Can anyone tell me how any of these provisions actually help current homeowners in financial distress?

“Look out Wall Street, California is no longer the Wild West,” Lieu said in a statement Monday. “Although it took two years, I am pleased to have been able to overcome the powerful interests blocking reform so that future generations won’t ever experience this type of crisis.” Ladies and gentlemen, California has historically been one of the most regulated states in the U.S. when it comes to anti-predatory lending laws. This is another example of how politicians at the state and federal level leverage economic crises to further the false perception of “fixing” that which they don’t truly understand. The mortgage and realtor industries have long supported reasonable legislative proposals and oversight. What’s really happened, however, is that the more regulated the home lending industry has become the more difficult it is for qualified borrowers to purchase or refinance homes. So-called “reforms” are creating more bottlenecks than ever for American homeowners.

Other mortgage-related bills signed by the governor:

* SB 36, by Sen. Ron Calderon (D-Montebello), sets licensing requirements for all residential loan originators.

* SB 239, by Sen. Fran Pavley (D-Agoura Hills), makes it a felony to commit fraud on a mortgage loan application. It’s already a Federal offense.

* AB 329, by Assemblyman Mike Feuer (D-Los Angeles), requires lenders to give more and clearer information to those interested in reverse mortgages, which let seniors borrow against their homes’ equity. Now they just need to define what they mean by “more” and “clearer”. When exactly was the last time you heard about senior citizens being defrauded by unscrupulous reverse mortgage lenders, you know, like Wells Fargo or Bank of America? This is another one of those empty consumer protection cap feathers politicians love to wear — too bad it’s not an election year.

* SB 237, by Calderon, creates a registration program for appraisal management firms. Makes no difference to the horrendous aberration property appraisal has become since NY Governor Andrew Cuomo managed to convince the federal government to adopt “price averaging”
valuations as the status quo. Home owners, home buyers, Realtors, and mortgage lenders have been gnashing teeth since May of 2009 when this nightmare manifested itself in the form of thousands of ongoing cancelled escrows and further declines in home prices nationwide. Hopefully someone at the federal level with some common sense will see to it that this knee-jerk reaction to proper valuation techniques and lender involvement in appraisal ordering is summarily rewritten to be more favorable to the very consumers it’s supposed to protect.

* AB 957, by Assemblywoman Cathleen Galgiani (D-Stockton), allows buyers of foreclosed homes to choose local escrow officers, rather than being forced to use the escrow company chosen by the seller. This provision is actually wonderful. Now if they’d only extend that right to all buyers of all CA properties! This long-standing practice of “steering” buyers to the listing agent’s preferred escrow limits consumer choice for no reason. Mortgage brokers are glad to see this provision enacted.

* AB 1160, by Assemblyman Paul Fong (D-Cupertino), requires that mortgage loan documents be written in the same language the verbal negotiations were conducted in. And finally we have this little goodie. Loan documents written in the same verbage that you and your lender discussed in negotiations? Are robots running banks and brokerages now? What’s next? Your conversations with your mortgage broker need to be recorded, transcribed, and filmed in order that the documents you sign say the same thing you otherwise can’t understand if put in front of you in writing? I don’t know about people in the Cupertino, CA district, but Assemblyman Paul Fong needs to know the people of California aren’t brain dead when it comes to reading and simple cognitive skills. You have every right as a borrower to have all of your questions about your loan explained to you before you commit to anything, and lenders and brokers have a legal fiduciary duty to answer all of your questions. You have the right to a written Good Faith Estimate of the costs of your loan, along with the mountain of consumer disclosures your trusty state and federal lawmakers have seen fit to make sure you sign acknowledging that you understand your rights. New laws just put into effect this year already require two or more “cooling off” periods where you have a chance to contemplate the loan program you’ve been discussing with your lender well in advance of your loan documents being issued, even if you understand what a mortgage loan is and you want to proceed. The LAST thing anyone needs now is legislation with language that’s as vague and utterly ambiguous as that just signed into law. In an age of full disclosure, this just invited future confusion.

Californians would be wise to ask future political candidates for office at all levels of government just exactly what kind of wizardry they propose to pull out of a hat under the pretense of “homeowner protection”.

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