Schwarzenegger vetoes bill increasing oversight of mortgage brokers
sacramento -- As Congress put the finishing touches on a nearly trillion-dollar financial bailout package, Gov. Arnold Schwarzenegger on Thursday vetoed a bill to crack down on state-licensed brokers who put borrowers into loans that they can't afford.
The bill, AB 1830, by Assemblyman Ted Lieu (D-Torrance) was the most far-reaching of more than a dozen introduced by California lawmakers in January as residential foreclosures rose and the subprime mortgage crisis began to ravage California's economy.
Schwarzenegger in a veto statement said the motives of the bill "are to be lauded" but criticized it for overreaching.
The proposal puts state-licensed brokers at a competitive disadvantage compared to federally regulated mortgage banks, he said. Furthermore, the governor said provisions in the bill allowing consumers to recover attorneys' fees when they win suits against brokers could lead to "increased litigation."
Thursday's veto was a loss for homeowners, Lieu said. "Wall Street won and Main Street lost today when the governor vetoed AB 1830, a comprehensive, bipartisan, subprime mortgage reform bill that would have fixed a dysfunctional system."
Lieu's bill was supported by consumer groups and opposed by real estate and mortgage broker trade groups. Other financial groups, including bankers and credit unions, canceled their opposition during earlier negotiations.
Even though the bill was watered down by the Legislature, Lieu said it would be one of the toughest state laws in the nation. He said it would strengthen regulation of the state's approximately 35,000 mortgage brokers, who arrange loans for home buyers.
Among other things, the bill also would have directly prohibited so-called mortgage steering, whereby a borrower who qualifies for a lower-interest mortgage is persuaded to take a higher-cost and higher-risk loan. This practice can often cost consumers more and increase a broker's profit.
Specifically, Lieu's bill would have locked into law the requirement that a mortgage broker must place the economic interests of the borrower ahead of the broker's own profit. A violation could result in loss of a state license and civil penalties of up to $10,000 per violation.
Lieu points to studies that indicate more than 50% of prospective borrowers with credit scores that made them eligible for traditional, fixed-rate mortgages were "steered" into riskier adjustable-interest-rate products that made them vulnerable to foreclosure.
Other provisions would have banned brokers from making false or deceptive statements regarding subprime loans; put caps on penalties paid by borrowers for paying a loan off early and outlaw many so-called negative amortization loans that could leave a borrower owing more than the original loan balance.
Shortly before imposing the veto, Schwarzenegger announced that he signed 10 far less sweeping mortgage-related bills that he said would "increase the accountability in the real estate market."
marc.lifsher@latimes.com
