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Los Angeles, California

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Paul Kiesel
Paul Kiesel
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Governor Schwarzenegger Vetoes Subprime Mortgage Reform Bill

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Amidst the frenzy of last week’s stock market turbulence, the $700 billion "rescue" package, and the Presidential Debate, Governor Schwarzenegger vetoed a bill last Thursday that would have prevented state-licensed brokers who put borrowers into loans they couldn’t afford.

AB 1830 would have gone further than the Federal Reserve’s new Truth in Lending Act rules, which were passed when the housing bailout bill was signed by President Bush in July, as it would have cracked down on the excesses that fueled the housing bubble, particularly the chicanery and other insidious tactics made by mortgage brokers and specialized lenders that flooded the market with irresponsibly written loans. Schwarzenegger lauded the motives of the bill, however, he criticized it for overreaching.

Most supporters of AB 1830 were extremely disappointed by the bill’s failure. Assemblyman Ted Lieu (D-Torrance) said, "Wall Street won and Main Street lost today when the governor vetoed AB 1830, a comprehensive, bipartisan, subprime mortgage reform bill that would have fixed a dysfunctional system."

Provisions of AB 1830 would have banned loans that allowed subprime borrowers to slip into greater debt over time, and a prohibition on financial incentives that would have enticed mortgage brokers to steer borrowers into more expensive interest rates and/or riskier loans.

Schwarzenegger said in his veto message that the measure would have put state-licensed brokers at a disadvantage when competing with federally chartered banks that made subprime loans.

A disadvantage? Meaning that mortgage brokers would have been less able to mislead consumers into bad loans, or steer them into "creative financial instruments" that aren’t in their best interest. That’s what got us into this mess to begin with. The free reign that mortgage brokers had in putting together improperly, if not illegally, written loans that do not explicitly state the terms of the loan (this was often the case with option ARM or teaser interest rate loans: they did not state they were negative amortizing loans, a violation of the Truth in Lending Act).

The governor also complained that, "This provision [would] likely lead to increased litigation based on de minimis violations as plaintiffs attorneys will have much to gain and little to lose." However, regardless of what Gov. Schwarzenegger thinks, the California Supreme Court disagrees with him on this point. (i.e. Ketchum v. Moses: Because a prevailing party will receive attorney fees only if the case is successful, there is little or no incentive to pursue nonmeritorious cases.)

The Los Angeles Times editorial board pushed hard for the measure and said that, "[It] sounds like the governor was searching for a pretext, rather than finding legitimate flaws in the bill."