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Paul Kiesel
Paul Kiesel
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Lending Regulation Bills to be Voted on in Sacramento

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The Banking, Finance and Insurance Committee will be taking a look at various bills related to the subprime mortgage mess, that are being brought to this committee in hopes that it will prevent the severity of what’s going on in the financial marketplace from occurring again. The bills will likely have a mild effect on the rising tide of foreclosures (including the pending interest rate resets that prime borrowers will go through; subsequently suffering many of the same pains subprime borrowers have been and still are going through), but the importance of the bills is that they will provide regulations within and more oversight throughout the lending industry (regulations that had not existed before).

As noted in a Los Angeles Times editorial, the bills would “limit prepayment penalties, which can deter borrowers with bad loans from refinancing into better ones, and eliminate a financial incentive for brokers to steer borrowers into loans with higher interest rates. In doing so, it would require borrowers to be given a clear choice between loans and without penalties, and between higher rates or higher upfront fees [. . .] the bill[s] would stiffen the state requirement that lenders not provide larger loans than subprime borrowers can reasonably be expected to pay [. . .] and it would prohibit lenders from refinancing loans unless there’s a real benefit to the borrower,” (Los Angeles Times, 6/18/08).

It’s amazing that pragmatic rules and regulations, such as the ones these bills present, were not in effect when the subprime boom began. How much trouble we could have avoided will never be known, but it is highly implausible to think that the banks and homeowners would be in such precarious situations as they are now, if we had had more oversight five years ago.

Granted, the bills that will be voted on in Sacramento only apply to the State of California, however, if they pass and become law, a venerable precedent will have been set; making it more likely that federal regulators to follow.