Loan reform efforts stymied

A key Senate committee Wednesday killed or greatly watered down a series of Assembly bills that would have imposed new regulations on sub-prime mortgages in an attempt to curb the worst wave of foreclosures since the Great Depression.

The measures, part of a package launched with fanfare last winter by the Assembly leadership, sought to protect Californians from getting stuck with loans they couldn’t afford and didn’t understand.

Sen. Michael Machado (D-Linden), chairman of the Senate Banking, Finance and Insurance Committee, opposed most of the bills, saying they would subject the mortgage industry to contradictory federal and state regulations.

Machado worried that cracking down on mortgage bankers and brokers could dry up credit and “restrict the accessibility to home loans for the very people” lawmakers were trying to help.

Consumer advocates were outraged.

“The system does not work in favor of the consumer,” said Kevin Stein of the California Reinvestment Coalition, a group that promotes economic development in low-income communities. “The lobbyists for the industry outnumber the consumer groups. They seem to have greater access [to lawmakers] and give more money.”

During more than five hours of hearings, both Republicans and Democrats on the committee supported only one measure that had been high on consumer groups’ agenda, a bill by Assemblyman Alberto Torrico (D-Newark), AB 529, that would require lenders to give homeowners more advance notice when their sub-prime adjustable-rate mortgages were about to reset to a higher interest rate.

An Assembly centerpiece proposal by Assemblyman Ted Lieu (D-Torrance) to ban so-called stated-income loans died, as did a prohibition on less-than-interest-only loans, whose principal actually increases with each monthly payment.

With stated-income loans, borrowers are not required to provide proof that they earn enough to meet payments.

The committee opposed another part of Lieu’s bill that would have limited the collection of penalties from borrowers who want to pay off a loan early, before its monthly payment amount soars.

“My bill was completely gutted,” said Lieu, noting that he felt forced to accept amendments that rewrote his measure, AB 1830, so that it would do nothing more than conform with expected federal regulations. “I believe the prohibitions and regulations in my bill were very commonsense, and I was sort of stunned that even those modest efforts at reform wouldn’t get the votes.”

A related bill, AB 2740, by Assemblywoman Julia Brownley (D-Santa Monica), drew no support from committee members. It would have regulated mortgage loan servicers to ensure they properly posted payments and correctly handled mortgage escrow funds.

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marc.lifsher@latimes.com