The state of California usually leads the charge when it comes to progressive legislation. Now, Californians have new mortgage laws and mortgage license regulations. But consumer advocates wonder if it's enough to protect borrowers from mortgage broker fraud.
Gov. Arnold Schwarzenegger signed 10 new real estate and mortgage laws in late September. Now, the state that's famous for its wild housing bubble and the foreclosure avalanche that followed, has taken measures to protect consumers from mortgage broker misrepresentation, incompetence, and outright fraud.
The former actor, nicknamed "The Governator," hopes to terminate lax mortgage regulation to ensure that mortgage brokers are qualified before they're awarded a license.
"I am pleased to sign legislation that protects consumers and creates a responsible and accountable lending environment that will encourage home ownership in our state," Schwarzenegger said in an official statement released to the press following the signing ceremony.
Mortgage brokers: License and Regulation
But critics, including many consumer advocacy groups, think that he's not doing enough, and believe that he shouldn't have nixed an important section of the original draft of the mortgage regulation package that demanded an official fiduciary role for mortgage brokers. When professionals are bound by fiduciary responsibilities, they're required by law to put the financial interest of their clients first. Much of the fuel propelling the mortgage crisis came from mortgage brokers who did just the opposite. Because of a conspicuous absence of mortgage regulation, many mortgage brokers across the U.S. practiced the profession without licenses, and were rewarded huge commissions by mortgage lenders in exchange for pressuring home buyers into high-priced loans that were risky and inappropriate. Some mortgage brokers even did business despite felony criminal records. As a result, California and other states are now taking a more proactive role in mortgage regulation.
Continuation of mortgage mistakes
The governor also vetoed mortgage laws in the bill that would have called for caps on prepayment penalties and negative amortization on some categories of higher priced loans. These types of mortgages generally carry heftier than normal rates and fees, because they're made to borrowers with bad credit. Subprimes, for example, are within the "high priced" loan category. The California legislator who authored the original bill was disappointed in Schwartzenegger's vetoes, and he pledged to present another powerful mortgage regulation overhaul proposal soon. According to newspaper reports, the legislator said that the governor's failure to pass the entire mortgage law in its entirety was a repetition of the same kind of mistakes made by the lending industry in the run-up to the mortgage crisis meltdown in the first place.
One bonus for homeowners is that the Golden State also passed a new law that says that taxpayers who have a portion of their mortgage debt forgiven are no longer required to pay state income taxes on the forgiven debt. The change updates California tax rules in a similar way to what the federal government recently did when it revamped IRS taxation regarding forgiven mortgage debt.