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Some Neg Am Loans, Prepays May be Banned in California


Pay option arms, which allow homeowners to make less than the interest-only mortgage payment each month (negative amortization), may be partially banned in the state of California if proposed mortgage reform legislation becomes law.

Yesterday, Assemblymember Ted Lieu announced that the California Assembly passed “Assembly Bill 260,” which bans the worst of so-called “predatory lending practices.”

“More specifically, AB 260 would create a strong fiduciary duty standard for mortgage brokers across all loan products,” Lieu’s office said in a release.

“It eliminates compensation incentives that led to riskier loans, directly prohibits steering, and directly prohibits brokers and lenders from making false or deceptive statements connected with a subprime loan.”

It also establishes clear regulations for prepayment penalties and bans negative amortization on “higher-priced mortgage loans,” while imposing stiff penalties to prevent abusive subprime lending.

Essentially, brokers would not be able to receive compensation (yield spread premium) for tacking on prepay penalties to higher-priced loans (which I’ve yet to find a clear definition for), effectively rendering them useless.

A similar bill was vetoed last year by Governor Schwarzenegger, but the ongoing mortgage crisis has forced him to call a Special Session of the Legislature.

“We must enact landmark reforms to address the systemic failures in California’s subprime mortgage industry,” said Assemblymember Lieu.

“These failures have not only devastated California’s economy, they have contributed to a national and international financial meltdown.”

The bill’s provisions would apply to the higher-priced mortgage loans originated on or after July 1, 2010.

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