SACRAMENTO — Democrats who control California's Legislature have come up with a new plan to regulate the state mortgage industry that gives homeowners more leverage against their lenders.
The draft legislation, provided Friday to The Associated Press, would bar banks from foreclosing on homes while loan modifications are pending, let homeowners sue mortgage providers who break state law and require lenders to provide a single point of contact to borrowers.
The plan is an extension of a national settlement that imposed new restrictions on the five largest U.S. banks. Under the bill, which a special legislative committee will consider next week, all California lenders that process more than 175 foreclosures per year would have to adhere to the new regulations.
Previous efforts to reform California's mortgage industry have stalled amid stiff opposition from banks and other lenders, and from Republicans and moderate Democrats who were concerned more sweeping restrictions might raise borrowing costs and further stall the recovery of the state housing market. The latest plan came after weeks of negotiations.
Sen. Ron Calderon, a moderate Democrat from Monterey Park who opposed the original legislation, now supports the compromise after helping negotiate key concessions. The changes include giving lenders the chance to fix problems before consumers can file lawsuits, limiting costly nuisance lawsuits, and exempting small lenders from some of the requirements.
"We focused mainly on two principles: fair treatment of borrowers and keeping California's economy on track," Calderon said. "I think that we struck a very good balance."
Beth Mills, spokeswoman for the California Bankers Association, said her organization was still reviewing the draft bill but initially believes it is still too broad and could allow frivolous lawsuits by borrowers who cannot afford to stay in their homes.
Dustin Hobbs, spokesman for the California Mortgage Bankers Association, said it was too early for his organization to take a position, but he criticized the committee for scheduling a vote next week before interest groups have had a chance to analyze the latest language.
Meanwhile, a coalition of homeowners, Occupy groups, unions and others announced they will rally Monday at the Capitol to push for a moratorium on all foreclosures, something that goes well beyond the legislative compromise.
The package would:
— Let homeowners sue mortgage providers if they violate state law, but only if there is a significant violation. Homeowners could ask judges to halt pending foreclosures but could collect monetary damages only if the foreclosure took place. Lenders would be liable for triple damages if they engage in willful, reckless or intentional violations.
— Give lenders a chance to fix problems with individual borrowers on their own before they can be penalized — a key demand by the banking industry.
— Require lenders to provide a single point of contact for borrowers who want to discuss foreclosures or refinancing, with an exemption for smaller lenders.
— Ban what are known as "dual-track foreclosures" by barring lenders from filing notices of default, notices of sale, or conducting trustees' sales while they are also considering alternatives to foreclosures like loan modifications or short sales.
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