California senators called Wednesday for tougher regulation of "hard money" lending, a common but poorly understood financial service.

The joint hearing of Senate financial committees was held in response to a Bee investigation published last year that found widespread illegality in the industry, costing investors and borrowers hundreds of millions of dollars in recent years.

"The laws and regulations need to be clearer," said Sen. Juan Vargas, D-San Diego, chairman of the Committee on Banking and Financial Institutions. "Too many people are falling victim to these good sales pitches" that later prove fraudulent.

"There's an ever-increasing concern regarding regulatory gaps," said Sen. Curren Price, D-Inglewood, chairman of the Committee on Business, Professions and Economic Development.

Hard money brokers operate like private banks, lending to individuals or companies that don't qualify for conventional loans. Such brokers often focus less on the ability of the borrower to repay the loan than on the value of collateral that can be seized in a default.

Hard money often funds worthy projects with legal, fair terms, but has been prone to abuse. A leading banking analyst, Bert Ely, has called hard money lending "legalized loan sharking," due to its high fees and interest.

Unscrupulous brokers inflate property appraisals, prompting bloated loans that lead to borrower defaults. In such cases, investors financing the lending lose their funds after signing away their rights. The brokers then take control of the property.

The Bee found that statewide, one-fourth of the largest hard money brokers operating around the time of the real estate bubble had been sanctioned or accused of improprieties by the California Department of Real Estate.

Margaret Fowler lost much of her fortune by investing in loans brokered by Gold Country Lending, a company that operated in Nevada County.

"We were not savvy investors," she told the senators. "Like a lot of people, we trusted someone."

Gold Country collapsed during the real estate crash, losing tens of millions of investor dollars. Afterward Fowler learned the firm had violated numerous laws – including lending investor funds to projects owned by Philip Lester, Gold Country's chief executive. Lester surrendered his real estate license. His case is under investigation by the California attorney general.

Sen. Sam Blakeslee, R-San Luis Obispo, called hard money lending "a very fertile area for legislative action."

Overlapping and complex regulations, administered by the state Department of Corporations and Department of Real Estate, contribute to the problem, Blakeslee said. "It's about bringing some professionalism to this industry (which is) frankly riding roughshod over the market."

The senators said they would consider new reporting requirements for brokers and rules to limit investments in such loans to 10 percent of an individual's net worth – a response to losses by investors who lost their life savings.

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