Gov. Arnold Schwarzenegger vetoed a proposal Thursday that would have imposed tough restrictions on mortgage brokers, such as banning exotic loans to risky borrowers that cause balances to grow rather than shrink over time.

The Republican governor's veto of Assembly Bill 1830 blocked what consumer groups considered the most significant housing-related proposal on his desk.

It was one of numerous bills this session that responded to California's battered housing market, whose problems have been partly blamed on irresponsible lending practices.

Schwarzenegger, in his veto message, said AB 1830 had laudable goals but that it "overreaches and may have unintended consequences."

The bill by Assemblyman Ted Lieu, D-Torrance, would have specified that mortgage brokers have a "fiduciary duty" to borrowers, exposing brokers to greater liability for violating that duty. Consumer groups said that was important as an enforcement tool.

AB 1830 would have prohibited brokers from steering borrowers toward higher-risk loans than they would qualify for based on their income and credit. It would have curtailed incentives tied to riskier loan products and capped prepayment penalties.

The bill also would have banned risky borrowers from obtaining "negative amortization" loans, agreements that offer low initial payments but increase the principal balance over time, making them difficult to pay off.

"I'm appalled that he vetoed it because it shows he cares more about a few special interest groups than the people of California," Lieu said.

Schwarzenegger, in his veto message, wrote that AB 1830 would have applied only 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.

Major financial groups, such as the California Credit Union League and California Bankers Association, were neutral after winning concessions. But mortgage brokers and Realtors remained opposed, citing concerns about constricting "legitimate credit" and the potential for trivial lawsuits.

John Holmgren of the California Association of Mortgage Brokers said restrictions were too broad and would have hampered some traditional, worthy borrowers from obtaining loans. He acknowledged the mortgage industry made mistakes but said it was not solely responsible for market problems.

"The industry does bear some responsibility for its failure to adequately explain things that consumers got into," he said. "But when you look at the overall crisis, there's plenty of blame to go around. It ran all the way up and down the line, from the consumer to the originator to the bank to the packager of securities to the investor."

Groups representing low- income residents and consumers pushed hard for the plan, saying it would have deterred brokers and lenders from selling risky loans to vulnerable borrowers.

"His veto is quite surprising given that California is really the epicenter of the national foreclosure crisis that resulted from reckless, irresponsible lending," said Paul Leonard, California director of the Center for Responsible Lending. "He was in a position to address entities responsible for 60 percent of the subprime loans made in 2006."

Schwarzenegger signed other mortgage-related bills Thursday. Senate Bill 1461 by Sen. Gloria Negrete McLeod, D-Chino, requires real estate agents to disclose license numbers on marketing materials. SB 1737 by Sen. Michael Machado, D-Linden, closes a loophole so the state can prevent violators of real estate law from continuing to practice.

Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548.