The state of California had a chance to curb lending practices that would later contribute to a crisis in subprime mortgages when it set out in 2001 to regulate so-called "predatory" loans.

But lawmakers, many of whom took campaign contributions, trips to Hawaii and Rolling Stones concert tickets from subprime lenders, narrowed the legislation so much that consumer protections covered only a tiny percentage of mortgages, a review by The Bee found.

Saying they didn't want to dry up the market by being too restrictive, lawmakers produced a bill that let most lenders easily avoid making loans that triggered homebuyer safeguards.

One court decision further eroded the law's clout. In the face of industry opposition, lawmakers ignored warnings from consumer groups and killed a provision in a 2005 bill to reverse the court's interpretation and broaden the scope of the state law.

Major players in the subprime industry, meanwhile, contributed generously to governors, legislators, their causes and their entertainment.

They were led by Ameriquest, now out of the mortgage business, which contributed $9.6 million to political causes from 2001 to 2006, according to filings with California's secretary of state.

Ameriquest didn't limit its giving to campaign cash. It paid $72,000 for Assembly Democrats to attend a fundraiser in Hawaii during the Pro Bowl in 2005, including gifts, airfare, lodging at Hilton Hawaiian Village and meals – even $170 for cookies.

It handed out almost $90,000 worth of tickets to the 2005 Rolling Stones tour it sponsored, to both Democrats and Republicans. And it paid $95,000 to put up Democratic lawmakers at the Four Seasons Resort in Carlsbad so they could attend a golf tournament fundraiser held by Senate President Pro Tem Don Perata of Oakland.

Ameriquest didn't limit its largesse to Democrats, either. In recent years, some of its biggest contributions have been to Republican Gov. Arnold Schwarzenegger and his political causes.

When the 2001 law was passed, "Ameriquest had unique access, I remember that," said Kevin Stein, associate director of the California Reinvestment Coalition, which advocates equal access to banking and other financial services.

Whatever the reasons, the state missed the chance to head off a crisis that threatens to get even worse, said Norma Garcia, senior attorney at the West Coast regional office of Consumers Union, publisher of Consumer Reports magazine.

"What we see today is what we said was going to happen," Garcia said. "It is very distressing to know that a lot of what we proposed in 2001 could have had an impact."

Sen. Mike Machado, D-Linden, oversaw the 2001 legislation as chairman of the Senate Banking Committee. He said it was meant to address a different problem – sharp operators tricking elderly and other vulnerable people out of the savings they had tied up in their houses.

No one could have foreseen the dizzying variety of mortgage offerings that would crop up in ensuing years to entice borrowers with less than perfect credit, he said.

Feelings ran high on both sides, Machado said.

"Considering the very volatile climate we had at that time dealing with that legislation, compromises were made," he said. "Were the compromises good compromises? Some would say no. But I think we moved the ball."

The public record does not indicate that anyone in 2001 anticipated the scale of the crisis. But many of the provisions of the bills considered in that and ensuing years dealt with matters at the heart of the skid to come, such as making sure borrowers could afford their loans.

The subprime industry, meanwhile, assured lawmakers as recently as 2005 that the law was working as intended.

"Marginal or shoddy players who engaged in questionable practices have been driven from the market as professionally managed and efficiently run firms like New Century have flourished," Terry Theologides, executive vice president of New Century Financial Corp., told a legislative committee, according to a transcript. Theologides did not return a phone call seeking comment.

Two years after that testimony, New Century, once the nation's second-biggest subprime lender, filed for bankruptcy protection and faced criminal investigations.

California was hit hard by the subprime collapse. One of every 88 houses in the state is in foreclosure – including 7,600 in the Sacramento area this year.

Although some lending institutions are overseen by the federal government, 60 percent of subprime lenders are regulated by the state, giving the Legislature a significant role in overseeing the industry.

Lawmakers now are looking for ways to defuse the crisis, but consumer advocates say they blew their chance to do something more before the crisis hit.

In 2001, consumer groups pushed for a law to deal with so-called predatory lending practices, in which lenders took advantage of borrowers with shaky credit. Such practices generally took place in subprime loans, made to borrowers with poor credit, limited income or high debts, at the cost of higher interest rates and fees.

First came Senate Bill 608 by then-Sen. Joe Dunn, D-Santa Ana. Consumers considered the bill the "gold standard" of anti-predatory lending legislation.

Among other things, Dunn's bill contained a provision that would have dealt with an issue that later became key in the mortgage crisis. That provision makes investors who buy securities based on mortgages liable for any irregularities in the original loans.

The subprime boom was fueled by the growth of a secondary market for mortgages in the form of securities of bundled mortgages, backed by Wall Street.

Consumer advocates say that provision of Dunn's bill could have gone a long way toward making the industry police itself.

But the industry warned that bills like Dunn's would dry up the subprime mortgage market.

The bill was shelved in the Senate Banking Committee.

In its wake later that year came Assembly Bill 489 by then-Assemblywoman Carole Migden, D-San Francisco. The bill was forged in a series of workshops between industry and regulatory officials.

AB 489 was weaker than the earlier bill in both its restraints on lenders and the number of loans covered.

But it did contain provisions that consumer advocates wanted, such as limitations on prepayment penalties and balloon payments.

"Our strategy was, let's get what we can now, and come back and expand it," Garcia said.

That was not to be. In fact, events after the passage of AB 489 weakened consumer protections.

One was the issue of whether Migden's bill would trump local government efforts when it came to regulating subprime mortgages.

The issue was pressing because around the time the Legislature passed its law Oakland approved an anti-predatory lending ordinance of its own, citing evidence that predatory lenders were "deliberately targeting low-income neighborhoods in Oakland through intensive mail and door-to-door solicitations."

The American Financial Services Association challenged Oakland's tougher law. Oakland prevailed in lower courts. But the Supreme Court eventually ruled that the comprehensiveness of the 2001 law implied that the Legislature intended to muscle out local ordinances.

The Oakland ordinance would have required subprime borrowers to get advice first from independent counselors – a measure the Legislature is now considering.

Today, a mortgage hotline set up by the city gets 35 to 50 calls a day from homeowners panicked about losing their houses, City Attorney John Russo said.

He guesses that a quarter to a third of those callers wouldn't be facing foreclosure if the Oakland law had been allowed to stand.

Another blow to the law came with a 2005 court decision that shrank the number of mortgages that must comply with it.

The case came about when a borrower named Daniel Wolski sued his lender, Fremont Investment & Loan. Wolski claimed he should have been covered by the 2001 law's consumer protections.

But the appellate court ruled that a bonus paid by the lender to the broker for putting Wolski into a higher-interest loan should not be counted towards "points and fees." The state law covers loans in which points or fees add up to at least 6 percent of the total. As a result, Wolski's mortgage was not covered by the state law.

Consumer advocates said the Legislature clearly intended to count the bonuses paid to brokers and tried to correct what they saw as the court's mistake in Assembly Bill 901 in 2005.

Industry mobilized, and the provision on counting broker bonuses was cut out of the bill in the Assembly.

"That thing went down in a ball of flames," Garcia recalls.

As a result of that and other factors, very few subprime loans in California were subject to the restrictions of the 2001 law.

It wasn't that the lenders had left California, as some lobbying for the industry had warned in 2001. Two years later, the subprime market accounted for 13.5 percent of mortgages in California, far more than the national share of 9 percent, according to a 2005 legislative background paper.

It's just that the lenders figured out ways to avoid making loans that would trigger the law.

Garcia heard from the Department of Corporations, one of three state operations in charge of enforcing the law, that "they were seeing a lot of loans that were set just below the trigger points, so the provisions did not apply."