The California State Assembly has just passed “The
Subprime Lending Reform Act of
2008,” which was introduced in January by Assembly Member Ted Lieu. Officially
titled AB 1830, the bill will amend and add to the State Financial Code
and will require lenders to qualify borrowers based on their ability
to pay over the life of the loan, not just the initial “teaser” rate, as well
as eradicate some types of bonuses for mortgage brokers who steer customers into high-risk loans. Also, the bill will prohibit a high-cost
subprime loan from including prepayment penalties, and looks to do away
with negative amortization loans, which occur when the
borrower pays less than the accrued interest each month. The need for mortgage
lending reform stems from what we all know as the “housing boom” of a few years
ago, when home prices rose dramatically and lenders were handing out loans to
just about anyone.
Now, home prices are falling, and those high-risk loans that were obtained a few years ago under less-than-desirable, and sometimes-shady circumstances are now forcing many homeowners out of their homes. Many loans were obtained by qualifying for a subprime, or “teaser” rate, such as 3 percent, which lasted maybe a few years, and now that the interest rate has popped up to 7 or 8 percent, many homeowners simply cannot afford their payments. Then, to make matters worse, many are not able to sell their homes for what they paid, and thus began the foreclosure crisis. AB 1830 looks to prevent this type of crisis in the future. According to the authors of the bill, it “is the centerpiece of a far-ranging effort by the Assembly Democrats to address the mortgage crisis that has led to hundreds of thousands of foreclosures, tightened credit markets internationally, and contributed heavily to the State Budget deficit.” Lieu calls AB 1830 “the solution we need to prevent the next mortgage collapse.” The bill is now in the State Senate, awaiting a first reading. For more information, go to www.assembly.ca.gov and click on Legislation.
