Gov. Arnold Schwarzenegger vetoed a proposal today that would have imposed tougher restrictions on mortgage brokers, such as banning them from issuing exotic loans to subprime borrowers that cause balances to grow rather than shrink over time.
The Republican governor signed several other bills dealing with mortgage lending, but his veto of Assembly Bill 1830 blocked what consumer groups considered the most significant state housing-related proposal on his desk.
Lawmakers wrote a multitude of mortgage bills this year in the midst of a battered housing market in California, whose problems have been partly blamed on irresponsible lending practices.
The bill by Assemblyman Ted Lieu, D-Torrance, would have banned subprime borrowers from obtaining "negative amortization" loans, agreements that offer low initial payments but increase the principal balance over time, boosting interest costs and making them difficult to pay off.
AB 1830 also would have specified that mortgage brokers owe a "fiduciary duty" to borrowers. It would have prohibited brokers from steering borrowers toward higher risk loans than they would qualify for based on their income and credit. And it would have capped prepayment penalties for borrowers who want to refinance their loans to seek better terms.
Schwarzenegger, in his veto message, said the bill had laudable goals but that it "overreaches and may have unintended consequences."
He wrote that it would have only applied to state-regulated firms and not those regulated by federal agencies, putting mortgage brokers in California at a competitive disadvantage to larger banking institutions. He also feared it would lead to trivial lawsuits because it would have allowed for a private right of action but would not have allowed defendants to recover their attorney's fees.
Groups representing low-income residents and consumers supported the plan, saying it would curb abuses in the lending industry. Mortgage brokers and Realtors were opposed, citing concerns about a spate of trivial lawsuits that could arise. Realtors also suggested it would tighten the availability of "legitimate credit."
Schwarzenegger signed other mortgage-related bills Thursday that were smaller in scope. Senate Bill 1461 by Sen. Gloria Negrete McLeod, D-Chino, requires real estate agents to disclose their license numbers on marketing materials. Senate Bill 1737 by Sen. Michael Machado, D-Linden, closes a loophole so the state can prevent violators of real estate law from continuing to practice.
Schwarzenegger has until Sept. 30 to sign or veto more than 800 bills that remain on his desk. Lawmakers passed the bills in August but withheld them until last week because Schwarzenegger threatened to veto any legislation until they passed a budget. The governor signed a $103.4 billion spending plan Tuesday, 85 days into the fiscal year.
Call The Bee's Kevin Yamamura, (916) 326-5548.
