California Bill Would Make Mortgage Lending Less Risky

A bill has been proposed in California that is designed to reduce the problem of predatory lending practices in the state. The bill was actually introduced last year but was vetoed by the governor when he quashed a number of bills due to a lack of time for review. The bill has been proposed again for consideration. It does have the support of a number of different groups but the mortgage and real estate business is currently opposed to the bill because of the hindrances it would place on their industry.

Basically the intent of the bill is to ban a number of different predatory lending practices that real estate lenders currently may implement. These questionable practices include:

• Strongly suggesting that clients take higher cost loans. This was the problem with the subprime lending which resulted in the current foreclosure crisis that plagues the state of California.
• Offering negative amortization loans. There is a type of loan in which the borrower makes monthly payments which are actually lower than the amount of interest that is being accrued. While that sounds nice, it means that you're digging yourself deeper and deeper into debt which is clearly not a good thing.
• Gearing loans towards low-income, low-credit individuals. The majority of problematic California mortgage loans that caused issues for people were loans that were made to people who couldn't actually afford to buy a home.
• Issuing penalties for prepayment. You can actually get penalized on subprime mortgage loans when you decide to repay them in advance!

If passed, the bill would make it so that these things could no longer take place. That sounds like a positive thing but the mortgage industry says that it's not as good as it looks. Their main argument is that it would reduce the number of California-licensed lenders because they wouldn't be able to compete with the federally-licensed lenders who could still engage in these predatory practices. However, supporters of the bill say that this is balanced out by the new changes taking place at the federal level. The bill does have the support of consumer groups and unions (although major groups like the Center for Responsible Lending say that it should do even more than it wants to do to prevent predatory lending). Consumers should pay attention to this issue as it unfolds.