The California legislature's subprime lending bill, SB 385 sponsored by Sen. Michael Machado (D-Linden) fails to protect consumers from dangers in the subprime market, the Center for Responsible Lending (CRL) said today. The legislation merely would require California's regulatory agencies to adopt federal guidelines covering certain "nontraditional" mortgage products that the same regulators have already published for comment and plan to finalize later this summer. The bill and the regulations do not cover the subprime products that have been the largest source of defaults and foreclosures.

"While we strongly support the legislature's attention to this critical issue, SB 385 falls far short of what is necessary to protect subprime borrowers from widespread abusive lending practices," said Paul Leonard, director of CRL's California office.

SB 385 is limited in its scope and application. The federal guidance that it will require California regulators to adopt does not address the risky 2/28 mortgage product – an adjustable rate mortgage (ARM) that starts out at an initial teaser rate for the first two years, but whose rates jump to unaffordable levels when the loan begins to adjust. This product is largely behind the rise in delinquencies and foreclosures nationwide, with an estimated 460,000 California homes likely to be lost as a result, according to the CRL report Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners.

Additionally, a recent CRL analysis prepared for the U.S. Senate Banking, Housing and Urban Affairs Committee found that 77% of a representative sample of recent mortgage-backed securities comprised of subprime loans were adjustable rate mortgages; 70% included abusive prepayment penalties and 37% were stated income or low-documentation loans.

"The market is clearly not correcting itself," said Leonard. "And while the Feds drag their feet and California lags behind, Golden State homeowners are losing their homes and risky products remain in the marketplace."

Thirty-five other states have already done through regulation what SB 385 attempts to do through legislation. And states like Ohio, Minnesota and Maine have already taken stronger and swifter legislative action that includes reforms such as eliminating prepayment penalties, requiring an assessment of a borrower's ability to repay the loan, more closely regulating the activities of unscrupulous brokers and escrowing for taxes and insurance.

The Center calls for California to take a comprehensive approach to assisting borrowers currently at risk and providing adequate protections to all new subprime borrowers. Recommended policy changes include:

  • Establishing emergency funding for housing counselors and attorneys to assist borrowers in trouble;
  • Implementing streamlined and objective standards for borrowers to qualify for refinance or relief through loan modifications;
  • Qualifying all borrowers at the fully-indexed rate, using reasonable assumptions for debt-to-income ratios;
  • Requiring lenders to verify income, using the array of tools already available;
  • Requiring escrow accounts for subprime borrowers to cover taxes and insurance;
  • Banning prepayment penalties, which lock subprime borrowers in the subprime market.

For more information: Ginna Green at (510) 379-5513 or

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