Bill requiring notice on mortgage rate increases clears committee

California lawmakers today took an early step toward trying to ease the state’s worsening sub-prime mortgage crisis, approving a bill in committee requiring lenders to repeatedly notify borrowers with adjustable-interest-rate loans about upcoming increases in their monthly payments.

The bill by Senate President Pro Tem Don Perata (D-Oakland) mandates notifications to start 120 days before the loan resets.

Perata’s measure, which was approved by the Senate Banking, Finance and Insurance Committee, also would force lenders and loan servicers to meet in person with a borrower in danger of defaulting on a loan.

The meeting would provide an opportunity to assess the borrower’s financial situation, suggest possible alternatives to foreclosures and connect the borrower with independent credit counselors to help them modify the terms of their loans.

“We want to make sure that there is a procedure that allows both the lender and the person who has the loan … as much time as possible to work out something,” Perata said in a statement issued by his office.

Perata’s initiative and similar bills recently introduced in the state Assembly build on efforts by U.S. Treasury Secretary Henry M. Paulson Jr. and Gov. Arnold Schwarzenegger to encourage mortgage servicers to temporarily freeze interest rates on loans or to refinance loans at lower monthly payments.

But much of the so-called foreclosure avoidance activity remains on the state level, where many mortgage bankers and brokers are subject to regulation.

The state Senate committee passed Perata’s measure just before convening the latest in a series of informational hearings to gauge the effect of a worsening sub-prime loan meltdown that in the third quarter of last year contributed to the nation’s highest mortgage delinquency rates in 21 years, according to the Mortgage Bankers Assn.

Today’s informational hearing focused on how to boost efforts to encourage lenders to modify loan requirements to keep interest rates affordable.

The hearing, held early in what is expected to be a contentious election-year session, is part of a much-publicized effort to show voters that the Legislature is doing something to stanch the economic hemorrhaging created by the sub-prime mortgage crisis.

More than half a dozen proposals are moving or soon will be introduced in both houses.

On Monday, the Assembly Banking and Finance Committee endorsed a proposal by committee Chairman Ted Lieu (D-Torrance) that would require lenders to report to the state information on the results of voluntary programs to help homeowners facing foreclosure.

“I hope that the data shows that the lenders are aggressively modifying loans to keep homeowners in their homes,” Lieu said. “But I fear that it may show otherwise.”

Mortgage bankers and loan servicers are opposed to the Perata and the Lieu bills, contending that they put an expensive administrative burden on companies that have been left short-staffed by employee layoffs caused by financial losses from the sub-prime mortgage crisis.

The Assembly committee also approved two other, less controversial sub-prime-related bills – a notification proposal similar to Perata’s and a measure requiring mortgage credit counselors to post security bonds and register with the state Department of Justice.

The package of Assembly and Senate bills “will be very helpful” in protecting borrowers in the future from the threat of foreclosure but might not be as useful in helping people who already have fallen dangerously behind on their home payments, Lieu said. “We can’t break existing contracts, so we have to depend on voluntary actions by the lenders and persuading them to do the right thing.”

marc.lifsher@latimes.com