Machado should support state rules that make lenders accountable

07/13/2008 2:33 AM

07/13/2008 2:36 AM

There is almost nothing good to say about the collapse of credit, the bursting of the real estate bubble and the foreclosure crisis. The news gets worse every day -- from being the nation's default capital to bailing out reckless bankers to learning that $5 trillion of federally backed mortgage paper is smelling like smoke.

The only good thing we're hearing are echoes from 1932, as consumer advocates and politicians vow they never will let this happen again. It was after the 1929 collapse that politicians enacted regulations that protected the nation for decades against such financial depredations. The dismantling of those Depression-era rules, pushed by Democrats and Republicans with ties to the financial industry, got us into our mess. Many believe the solution is to make the banking and mortgage industry more responsible.

Unfortunately, state Sen. Mike Machado does not appear to be among them.

In mid-June, several good bills came before the state Senate Banking and Finance Committee, which is led by Machado. None got through unscathed. The Linden Democrat, who will be termed out this year, said he would prefer the state align with federal rules and oversight.

We all know how well that's worked -- from importing lead-filled Chinese toys, to approving deadly drugs, to fighting to give automakers the right to dirty our air.

M ost mortgages are granted through state-chartered banks and brokers. That has spurred legislators in New York, North Carolina, Minnesota and nine other states to pass laws with strong consumer protections. Some in California are trying to follow suit.

One of the most far-reaching attempts was Assembly Bill 1830 by El Segundo Democrat Ted Lieu. It called for readable comparisons about the costs and risks, and would have removed incentives to sell higher-commission but riskier mortgages, banned pre-payment penalties, given mortgage brokers a duty to keep home buyers' interest at heart, and penalized brokers who sold people loans they never could repay.

When AB1830 got to Machado's committee, this forward-thinking proposal was eviscerated.

"He knocked the legs out from under a very important piece of legislation," said Norma Garcia, senior attorney with Consumers Union.

Kevin Stein, associate director of the California Reinvestment Coalition, said it wasn't just the neutering of AB1830 that hurt. Bills to require that documents be signed in the same language in which they were negotiated, that data be made public, and that those who profit from bad loans be liable for some of the costs also were clobbered.

But a week later, it was Machado's turn. He co-sponsored a mortgage bill in 2001 that provided modest consumer protections but offered nothing to prevent the debacle resulting in "liar loans" and exploding housing bubbles. In June, he brought six bills to the Assembly Banking and Finance Committee. If he had included the measures in Lieu's bill, it might have been perceived as tacit admission that his 2001 efforts had been inadequate. All six of Machado's bills failed.

The Center for Responsible Lending's Ginna Green didn't mourn their demise.

"It's not to say they would be useless, but they would not be effective in preventing the kind of crisis we have now in the future," she said. Today's predatory lending practices are "like a cancer. ... You can't put a Band-Aid on it; these practices have to be stopped."

The bickering did not go unnoticed. Assembly Speaker Karen Bass and Senate President Pro Tem Don Perata now are trying to make a deal.

On Monday, the Federal Reserve will release rules it hopes to see imposed on federally chartered mortgage banks -- which make about 40 percent of all loans. Few believe those rules will be adequate to stop this from happening again, which is why state rules are critical.

No area in the nation has been hit harder by mortgage defaults than the Northern San Joaquin Valley -- Machado's home. If Perata and Bass can work out a compromise, it would be wise for this respected valley senator to heed the echoes of 1932 -- unless he wants to be known as the Herbert Hoover of the valley.

Dunbar is the associate editor of The Bee. Reach him at mdunbar@modbee.com.

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