For a very long time, centuries even, it has been popular sport to criticize legislators. Often that criticism is focused on the notion that lawmakers are too busy: too many bills, too much intrusion in people’s lives, too much government. Reportedly it was Mark Twain who opined that no man’s money or property is safe while the legislature is in session.

The California Legislature takes its share of criticism for hyperactivity. As this column is written, the Senate has just approved a bill calling for lengthy nutritional disclosures by table-served restaurants with 10 or more locations in California, which was labeled as “nanny government” by opponents. But once in a while, the Legislature deserves credit for not overreacting to an issue, for waiting to see how events play out before crafting “solutions” which may not be necessary.

Thus far this year, the California Legislature has shown refreshing restraint on the issue of problem loans, defaults, and foreclosures. In decades past, when predictable market events have resulted in foreclosure increases, legislators have responded with bills calling for foreclosure moratoria, greater warnings to borrowers about the consequences of defaults, or other limitations on the nonjudicial process. Depending upon how things go over the coming months, someone could still introduce these sorts of proposals, but thus far the reaction of the California Legislature has been quite thoughtful.

As summer approaches and the legislative year heads into the final months, there are no bills in California which would limit the right of lenders to recover their security for real property loans. Instead, the focus has been on assuring that high-risk loans are carefully underwritten, with appropriate disclosures to borrowers of the risks inherent in certain loan products.

Specifically, Senate Banking Committee Chair Mike Machado (D-Stockton) has introduced SB 385. This bill requires state lending regulators, including the departments of Real Estate, Corporations, and Financial Institutions, to adopt regulations consistent with new federal guidance on “nontraditional mortgage product risks”. The resulting regulations would apply to mortgage brokers, Residential Mortgage Lenders, California Finance Lenders, and state-chartered financial institutions, including credit unions.

Significantly, the federal guidance does not prohibit the making of any specific loan. Rather, for certain targeted mortgage products which permit the deferral of principal or interest, including interest-only products and those with negative amortization, the guidance requires more careful underwriting and disclosures to borrowers.

The state agencies are proposing regulations already to apply the guidance to their licensees. In some cases, lender groups are very likely to argue that the proposals go further than the guidance, or exceed the statutory authority granted to the regulators. But at least at this point, and at least in Sacramento, no one is arguing that a lender should be prevented from recovering the security for the loan, or prohibited outright from making certain types of loans. In fact, more than one legislator has noted that the current mortgage environment is displaying a measure of self-correction, with lenders and the secondary market changing their behavior in response to defaults and foreclosures.

Of course, some groups representing consumers believe that much of the current situation was caused by lender greed, and that therefore greater regulation of lenders is appropriate. Apparently there have also been requests by consumer groups that lenders voluntarily cease foreclosure activity for some period. But these sorts of proposals have not been incorporated into any bills in Sacramento at this point.

The respective chairs of the Assembly and Senate Banking Committees, Ted Lieu from Torrance, and the aforementioned Mike Machado from Stockton, deserve credit for the measured response to the subprime lending situation. Both are balanced lawmakers who have expressed an interest in regulating where necessary, but not to the point of denying borrowers access to loan products they will need in future years.

As always, there are still bills pending with direct impact on trustees, but fortunately not the sort of “stop the presses” bills we feared. These will be reported in the next issue of UTA News.

For previous articles by Michael Belote, click here.