[Editor’s note: This was handed out at yesterday’s press conference by the Democratic leadership in the Assembly. If a special session is called by Governor Schwarzenegger on the subprime mortgage crisis, there will be bills with specific language that will be introduced. Otherwise, we may have to wait until the legislature reconvenes in January to see bills in print.]
Legislation to Reform Mortgage Practices and Prevent Crisis from Happening Again:
• Subprime lending reform:
Implement subprime lending reforms that protect borrowers and restrict certain types of products and fees for subprime loans.
o Ban yield spread premiums/incentives given to brokers to place borrowers in higher interest rate loans even though the borrower in fact qualified for a lower interest rate loan.
o Ban negative amortization loans in which the principal continues to grow despite monthly payments from the borrower.
o Ban stated income/no documentation loans used to circumvent traditional underwriting standards.
o Require lenders to consider the borrower’s ability to repay the loan over the entire life of the loan and not just the initial teaser rate.
o Require counseling/financial literacy of borrower for certain high cost risky loans prior to borrower being able to receive the loan.
o Ban prepayment penalties for certain types of loans. Borrowers with loans that contain prepayment penalties are often trapped into holding onto the loan even though they could refinance into a better loan.
• Cross-notification of license violations:
Require the Department of Real Estate to notify the Department of Corporations whenever a broker has been suspended and vice versa. This would codify an MOU between the two departments concerning license suspensions and prohibit licensees under investigation from working under a different lending law. Similar to AB 1538 (Lieu), February 23, 2007 version.
Legislation to Address Current Crisis:
• Standardize workout process:
A major problem encountered by counselors when assisting troubled borrowers is the workout process is different for each lender in regard to the information and paperwork required to process the borrower. This proposal would require mortgage lenders in California to develop, in consultation with state agencies, a standardized, systematic workout procedure and process.
• Foreclosure process reform:
Oftentimes distressed borrowers are afraid to respond to letters and phone calls from their lenders, even though the lender may be able to help do a financial workout arrangement with the borrower. A third party, such as a counselor, can often provide vital assistance during this time. This proposal would require lenders or their agent to notify local counseling agencies when they file a copy of the notice of default. Furthermore, lenders should notify local authorities if the foreclosed property is vacant and how they plan to manage the property in the intervening period between default and foreclosure. Lastly, each notice of default and foreclosure should include a homeowner bill of rights that provides a list of their legal rights and responsibilities in the foreclosure process.
• Mandatory Reporting and Data Collection:
Several months ago, some lenders and loan servicers stepped forward and made commitments indicating they would engage in workout arrangements with distressed borrowers. While their statements are welcomed, it is necessary for the state to have sufficient oversight over what agreements are being reached, and how many borrowers are actually being helped. This proposal will require lenders to submit data on a monthly basis outlining their contacts with distressed borrowers and the actions they take to assist those borrowers.
• Foreclosure Consultant Reform:
Revise the law related to foreclosure consultants to ensure that those facing foreclosure do not become further victimized by scams or outrageous fees. Also, provide for a registration process for those persons acting as foreclosure consultants.
• Mortgage lender ombudsmen
Require lenders who engage in subprime lending to have a dedicated ombudsmen to handle borrower complaints and/or assist borrowers with workout opportunities.
• Identify $10 million for credit counselors in the state.
We are working to identify funding of $10 million for counselors and legal services to assist troubled borrowers. California Reinvestment Coalition estimates that a small investment of $10 million could fund approximately 100 needed counselors throughout the state that could make a significant difference in the housing crisis. CRC estimates that 100 counselors can reach out to 150,000 borrowers and help 40,000 homeowners avoid foreclosure.