Activists to push new loan standards

sacramento -- With California facing its highest foreclosure rate in 20 years, consumer advocates are pressing the state Legislature to tighten standards used by lenders for approving loans and help consumers already in danger of losing their homes.

The state Senate Banking, Finance and Insurance Committee is holding a public hearing today on the mortgage meltdown, ensuing credit squeeze, their effect on California and what new laws are needed. This comes as the Calabasas-based giant Countrywide Financial Corp. and other lenders began layoffs and other lenders took action to cut back new loans they consider too risky.

This is the third hearing this year led by committee Chairman Michael Machado (D-Linden), who is backing a bill to require lenders to ensure home buyers can meet their monthly payments, even as rates increase in the future. But there’s more to do, he said.

“We have worked hard this year to put protections in place that will stop another sub-prime collapse from harming future California homeowners,” he said. “It’s time to take a look at what we can do to help the borrowers who obtained risky loans before these protections were in place.”

Machado said he was seeking testimony today from more than a dozen economists, bank executives, consumer advocates and regulators to come up with ways to restructure loans to avoid future defaults. He said the state needed a strategy to keep people in their homes and protect thousands of jobs in the construction and housing industries.

Consumer groups and individuals who say they have been victimized by questionable lending practices are expected to be in Sacramento today to tell lawmakers they need help, including emergency funding for foreclosure-prevention counseling and support for private efforts to renegotiate high-interest adjustable-rate mortgages.

“California has seriously lagged behind other states in its response to the meltdown in the mortgage market,” said Paul Leonard, California office director of the Center for Responsible Lending in Oakland. He noted that 36 other states had adopted rules that apply new federal lending guidelines to state-licensed lenders and brokers.

State regulators bristled at the criticism and said they were close to finishing new rules that lock the federal loan-review procedures into state law. A spokesman for the mortgage industry stressed that companies, responding to the market, had toughened lending standards independently.

At the center of the Sacramento hearing will be legislation by Machado and supported by consumer activists and the administration of Gov. Arnold Schwarzenegger. A key bill is SB 385, which calls for enhanced consumer disclosures to prospective home buyers about how much interest they will pay initially and how much rates could increase during the life of a loan.

Machado’s bill has passed the state Senate and currently is before the Assembly Appropriations Committee. The committee, however, is jammed with hundreds of other bills that have been backlogged by haggling over a more-than-50-day-late state budget.

Machado also is backing a second bill, SB 223, that would be used to hire 30 new examiners at the California Department of Corporations to increase surveillance of state-licensed mortgage bankers. That measure is in the state Senate and needs one more approval before going to the governor. Both bills must be passed before Sept. 14, when the Legislature is to adjourn for the year.

Meanwhile, state regulators are close to finishing provisions to make sure that brokers “provide more upfront, written disclosures,” said Tom Pool, a spokesman for the California Department of Real Estate, which licenses real estate brokers. The regulations require brokers to provide information about how much the payments rise with each subsequent adjustment for the first five years of a loan, Pool said.

He said the governor’s signature on the Machado bill should give California one of the nation’s strongest disclosure laws.

He said his department also was boosting public education efforts with a website -- www .yourhome.ca.gov, www.sucasa. ca.gov in Spanish -- and with aggressive enforcement against illegal practices by brokers.

Unfortunately, Pool noted, not everyone who has lost his or her home can be rescued. “With any real estate cycle, it’s a boom-and-bust model,” he said. “Obviously, the best thing we can do for consumers is education since we don’t have the statutory authority to unwind contracts to void prepayment penalties.”

Some California lenders have taken a neutral stance on Machado’s disclosure bill, meaning they neither actively support or oppose the proposal. But Dustin Hobbs, a spokesman for the California Mortgage Bankers Assn., said many of his organization’s 250 member companies “are already complying” with the federal lending guidelines.

“The lending community is committed to protecting homeowners because it’s in everyone’s best interest to avoid foreclosures,” Hobbs said. “Lenders do as much as they can to avoid that.”

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marc.lifsher@latimes.com