Mortgage fraud bills sent to Schwarzenegger

As financial carnage from the housing crash continues across California, state lawmakers have sent several bills that crack down on mortgage fraud to Gov. Arnold Schwarzenegger’s desk.

In recent days, the Assembly and Senate have jointly passed bills to ban loan modification companies from asking for upfront fees and make mortgage brokers put their customers’ financial needs ahead of their own commissions.

They’ve also limited the size of pre-payment penalties and added California to the roster of states that allow prosecutors to file specific felony charges for those accused of mortgage fraud.

"No one right now is doing these risky loans," said Assemblyman Ted Lieu, D-Torrance. "But five or 10 years from now people (will) forget, and if you don’t have these controls in place, the same thing happens again."

Lieu carried one of the Legislature’s most sweeping mortgage reform bills this year, Assembly Bill 260, which was sent to the governor this week. It bans so-called subprime "negative amortization" loans where the amount owed grows even as the borrower makes payments.

It also prevents mortgage brokers from receiving thousands of dollars in special fees for originating subprime loans and those with pre-payment penalties. The bill also limits the size of pre-payment penalties for borrowers who pay off their loans early.

Lastly, it requires that mortgage brokers have a fiduciary duty to borrowers – that is, they must place the "economic interest of the borrower ahead of the broker’s own economic interest" when making loans.

That provision is especially opposed by the California Association of Mortgage Brokers. Fred Arnold, a Santa Clarita-area broker and the group’s past president, said the bill’s definition of fiduciary duty is vague and an invitation to "frivolous lawsuits."

"It’s not necessary. We already have a fiduciary duty under the Department of Real Estate," said Arnold.

Last year, the governor vetoed a similar broad-based bill by Lieu to rein in mortgage industry practices. But Lieu said he worked with the Governor’s Office on this year’s version, noting, "We hope we’ve hit the sweet spot for a compromise."

The bills land on Schwarzenegger’s desk as California continues wrestling with more than 410,000 foreclosures since the start of 2007, the aftermath of unfettered lending practices earlier this decade.

During the housing boom, unscrupulous mortgage brokers could earn fees of $20,000 or more for making risky subprime adjustable-rate loans, often to unsuspecting borrowers.

Among groups backing changes in mortgage practices is the California District Attorneys Association, which is pushing for new felony penalties for mortgage fraud. The group sponsored a bill now before the governor, Senate Bill 239, by Sen. Fran Pavley, D- Agoura Hills. It would create a specific category of felony mortgage fraud, which the DA’s group calls "one of the linchpins in the demise of the California real estate market and the related crises in the financial sectors."

The group says Sacramento ranks seventh among U.S. metropolitan areas in reporting mortgage fraud complaints to the FBI.

Finally, Schwarzenegger faces a choice of two bills that would bar loan modification companies from asking struggling borrowers to pay upfront fees.

Both bills banning upfront loan modification fees – Assembly Bill 764 by Assemblyman Pedro Nava, D-Santa Barbara, and Senate Bill 94 by Sen. Ron Calderon, D-Montebello – passed the Legislature earlier this week. The governor has 30 days from a bill’s passage to sign it, veto it or let it become law without his signature.