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2008-06-26 17:22:53

New York Tackles Reckless Subprime Lending...Is California Next?

Recent headlines have been gloomy: housing prices continue to sink, Wall Street executives knowingly pushed bad subprime investments, and mortgages keep failing in droves.  As Congress debates how to put the economy back on track, the good news is that the states are moving ahead to prevent another subprime crisis in the future and strengthen communities now. 

New York is the latest to pass a tough law with stronger protections to put an end to many of the abuses that led to today's foreclosure crisis.  This action came on the heels of new laws in Connecticut and Maryland, and Michigan is actively considering a robust bill, too. Approximately a dozen states, including Ohio, Minnesota, and North Carolina last year, have taken the lead in passing common-sense protections consumers should have had all along.The New York law, which the Governor will sign in the next few days, cracks down on some of the abusive practices that led to today's massive foreclosures.  Among the key new protections are these:

  • Puts the brakes on reckless lending–lenders must consider a borrower's ability to repay a subprime home loan.
  • Stops trapping families in bad loans–prohibits prepayment penalties on subprime loans.
  • Discourages destructive refinances–bans flipping of any loans into subprime loans without a reasonable and tangible net benefit to the borrower.
  • Makes mortgage payments reflect true costs–requires escrows of taxes and insurance for all subprime loans.
  • Gives homeowners a fighting chance–allows violations to be offered as a defense to foreclosure to help keep people in their homes.
  • Provides more notice before foreclosure–requires a 90-day notice for delinquent borrowers who received a risky loan in the last 5 years, prior to beginning any foreclosure proceeding.
  • Encourages better communication and options for homeowners–requires settlement conferences between the foreclosing lender and homeowner before foreclosure.
California—the country's largest and most-expensive market—can especially benefit from adopting these critical protections.  Despite being the epicenter of reckless subprime lending, the California Senate Banking Committee recently gutted an already-limited package of common-sense mortgage protections in favor of toothless legislation merely directing state regulators to enforce weak federal laws.  California has the opportunity to be a leader in protecting home owners—and cleaning up the rampant abuses in subprime and nontraditional mortgages is the place to start.

California and other states that have yet to act on the foreclosure crisis would do well to take a page out of the playbooks of states like New York.  Our country's communities and economies can't wait.

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