Sub-prime sense

Astate Senate panel is scheduled to vote today on a spate of bills prompted by the sub-prime mortgage meltdown. The measures before the Banking, Finance and Insurance Committee would have an indirect effect at best on the rising tide of foreclosures -- none of them would bail out troubled borrowers or force write-downs of delinquent debt. Instead, most would try to gird the state against future housing bubbles by curbing abusive lending practices. There are good ideas in some of the bills, and lawmakers shouldn’t miss the opportunity to advance them.

The fiasco in the sub-prime market can be blamed partly on borrowers who took on too much risk in a volatile environment. Lawmakers shouldn’t try to stop people from taking chances with their money, but they can help the public avoid unnecessary risks. One of the problems revealed by the housing market collapse was the degree to which mortgage brokers steered unsophisticated borrowers into loans with above-market interest rates and unreasonable terms. That’s why it makes sense to try to reduce the incentives that drove predatory loans and to make it easier for consumers to understand the choices they face.

In particular, the committee should support a bill — AB 1830 by Assemblyman Ted Lieu (D-Torrance) -- that would regulate sub-prime loans in at least three valuable ways. First, it would limit prepayment penalties, which can deter borrowers with bad loans from refinancing into better ones, and eliminate a financial incentive for brokers to steer borrowers into loans with higher interest rates. In doing so, it would require borrowers to be given a clear choice between loans with and without penalties, and between higher rates or higher upfront fees. Second, Lieu’s bill would stiffen the state requirement that lenders not provide larger loans than sub-prime borrowers can reasonably be expected to repay. And third, it would prohibit lenders from refinancing loans unless there’s a real benefit to the borrower.

The balance the measure strikes between preserving choice and protecting borrowers against abuse isn’t perfect, but it’s reasonable. And although it would apply only to state-licensed brokers and lenders, it would set an example for federal regulators to follow. After all, California has the dubious distinction of leading the nation in foreclosure filings, so lawmakers shouldn’t be afraid to lead with their response.