CALPIRG Applauds Legislation to Rein in Subprime Mortgage Lending Industry
Sacramento,
CA— CALPIRG applauds Assemblyman Ted Lieu for introducing “The Subprime
Lending Reform Act of 2008.” The statewide public interest group also
praised Speaker Núñez and the other 35 representatives in the
legislature for co-authoring this important legislation. AB 1830 is a
significant step towards ensuring California’s consumers are protected
from unsound lending practices in the future.
“Lenders have
been rolling the dice with people’s futures, and their luck finally ran
out,” said Pedro Morillas CALPIRG Legislative Advocate. “With 500,000
foreclosures, and the state $14.5 billion in the hole, everyone is
going to end up paying the price for the lending industry’s gamble. The
question at hand is how to prevent the next mortgage crisis.”
Lenders
have been able to temper the chance they take in issuing subprime loans
by combining them with less risky investments on the stock market.
Borrowers don’t have the luxury of that safety net. AB 1830 will
require lenders to act in the best financial interest of the borrower
by banning certain abusive practices such as:
- Yield
Spread Premiums: Kickbacks to brokers from lenders for placing a
borrower in a higher interest loan than they qualified for. 20-40
percent of borrowers with subprime loans appear to have statistics
consistent with prime loan borrowers, meaning they could have gotten a
better deal on their mortgage.
- Prepayment Penalties: Fees imposed by lenders on borrowers for paying off a loan early. 80 percent…
-
Negative Amortization Loans: Loans with payments that are less than
the interest, which leads to a premium that keeps increasing every
month.
AB 1830 will also require lenders to verify that a
borrower can reasonably take on the loan they are choosing by requiring
lenders to:
- Base someone’s ability to repay on the full amount of the loan, not just the initial interest rate.
- Verify a borrower’s income. Stated income loans accounted for 50 percent of all 2006 California loans.
“There
are much deeper causes to the mortgage meltdown than a few over-eager
borrowers who got in over their heads,” concluded Morillas. “The
Subprime Lending Reform Act of 2008 will rein in the unsound business
practices of the mortgage lending industry that have, until now, gone
unchecked. Clearly, better regulations must be placed on an industry
that has the power to affect the economy on a global scale.”
