Wolk mortgage reform bill passes key committee

Bill increases mortgage brokers’ accountability, responsibility to borrowers

SACRAMENTO–Mortgage broker reform legislation by Assemblywoman Lois Wolk (D-Davis) passed from the Assembly Banking & Finance Committee today on a 7-2 vote.

“This bill focuses on the mortgage brokers who have been the least regulated in California, and who have accounted for a large and growing share of mortgages in the state, especially in the subprime market,” said Wolk. “My Assembly Bill 2880 will implement common sense corrections to an industry currently in turmoil. This is the type of measure that is necessary to restore confidence to the mortgage market in California, for the well-being and future of California’s homeowners, communities and economy.”

Wolk’s AB 2880 addresses the three principal problems with brokered loans by realigning the interests of borrowers and mortgage brokers. The bill:

• Requires in law that mortgage brokers owe a fiduciary duty to borrowers, that they must act in the borrower’s best interests, and must follow other professional standards of practice;

• Limits the use of yield spread premiums (YSP), the financial kickbacks that lenders pay to brokers for steering borrowers into higher interest rate loans, allowing YSPs only in true no cost loans in the prime market; and

• Increases accountability by adding a broker bond requirement for Department of Real Estate-licensed mortgage brokers, similar to bond requirements for brokers in other states.

Among those testifying in support were representatives from the bill’s cosponsors--California ACORN, the California Reinvestment Coalition, Consumers Union, and the Center for Responsible Lending.

“Generally borrowers think that the broker is solely and purely looking out for their best interest and is going to get them their best loan. In fact, the broker’s duties are not at all clear,” said Paul Leonard with the Center for Responsible Lending. “If anything, brokers tend to be influenced by the tremendous incentives of the yield spread premiums for selling a high interest loan to a borrower. Those financial incentives have proven too hard to resist for too many brokers.”

The bill will next be heard in the Assembly’s Judiciary Committee.