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Curbing mortgage abuse

Three bills that attempt to curb predatory lenders and avert future financial crises by regulating brokers deserve to be signed by the governor.

September 21, 2009

Two years after the problems in subprime lending sent the economy spiraling into recession, California lawmakers are still trying to clamp down on mortgage lenders in the hope of averting the next crisis. They've had little success -- opposition from industry and Gov. Arnold Schwarzenegger blocked their most aggressive attempt to regulate brokers and lenders last year. This year, they've approved three more modest efforts to increase accountability and curb abuses. We urge the governor to sign them.

The most significant of the bills, AB 260, is a watered-down version of the measure Schwarzenegger vetoed last year. Sponsored by Assemblyman Ted Lieu (D-Torrance) and two other Democrats, it would bar mortgage brokers from steering customers into more expensive deals, prohibit loans that allow subprime borrowers to slide progressively further into debt and eliminate financial incentives for brokers to add costly features. It also would require brokers to put borrowers' financial interests ahead of their own. In a concession to the governor, the sponsors dropped a provision that would have let consumers sue for violations of the bill's terms. Instead, it will be up to state regulators, whose performance has left much to be desired, and the state attorney general to enforce the new rules.

AB 260 goes hand in hand with a second measure, SB 36 by Sen. Ron Calderon (D-Montebello), that would require every broker or loan officer who originates mortgages to obtain a state license. Congress effectively required states to adopt such a rule, which will help weed out brokers who repeatedly flout state regulations. But the licensing requirements of the bill aren't as meaningful on their own as they would be with the duties laid out in Lieu's bill.

The third effort to curtail predatory lending is AB 1160 by Assemblyman Paul Fong (D-Cupertino), which would impose the common-sense requirement that borrowers who negotiate a loan in Spanish, Chinese, Tagalog, Vietnamese or Korean receive a translation of the key terms of the loan documents before they sign them.

The Calderon and Fong bills are non-controversial, but administration officials have complained that the Lieu bill would cost too much to enforce. That's a ridiculous objection, considering how much the proliferation of exotic mortgages and the ensuing housing market crash cost state government. It's true that Lieu's bill will reduce the freedom of borrowers to take on some types of risk. But left to their own devices, heedless borrowers and unscrupulous brokers put the entire economy in jeopardy. Having state government take away some of the liberty in the mortgage market is a small sacrifice to make in exchange for avoiding another meltdown.

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