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California has become a prime battleground in an emerging dispute over how far the government should go to protect borrowers from the economic fallout of the coronavirus crisis.
This week in Sacramento, a state legislative panel voted 7 to 3 to advance legislation that would temporarily halt auto foreclosures and foreclosures, expand consumer eligibility for loan forbearance, and limit lenders’ options. after payment deferral periods have ended.
The measure, which borrows from proposals defended by Democrats in Washington, is drawing opposition from banks, credit unions and other lenders. That should spark a bigger fight than the federal emergency relief law that Congress quickly passed in late March with bipartisan support, despite substantial disagreement over its borrower protection provisions.
At the heart of the debate is to what extent the government should restrict decision-making by financial institutions during the pandemic. Many banks and credit unions voluntarily offer forbearance to borrowers who have suffered financially, and it is often in the interest of lenders to do so. Deferred payments can allow borrowers to get back on their feet, preventing losses to lenders.
But supporters of the California law say many borrowers are being left behind. Over 30% of residential mortgages in the nation’s largest state are unsecured by the federal government, which means they are not eligible for 360 days of forbearance under the Federal Relief Act , according to a legislative staff analysis of the California bill.
Legislation by Democratic Assembly member Monique Limón would extend protections to homeowners with private mortgages. “What I want to make sure is that there is some standardization for Californians,” Limón said Tuesday during a hearing on the bill. “So far, it’s luck.”
The bill would also guarantee relief to troubled auto loan borrowers. Borrowers who say they are struggling during the pandemic would benefit from a 90-day forbearance, which could be extended. After the forbearance period, auto and mortgage loan managers would be required to work with borrowers to establish payment plans that avoid lump sum payments.
In Tuesday’s hearing, all three votes against the bill were passed by Republicans. But Democrats who voted to move the measure forward have also raised objections to various aspects of the bill. Limón has committed to making changes in response to the comments it has received.
Democratic Assembly Member Jesse Gabriel has expressed concern about the potential for borrowers who still have the option of making their loan repayments to take advantage of forbearance.
“The onus should be on consumers to show that they have suffered financial hardship if we are going to then impose hardship on our credit unions or other lenders,” said Gabriel.
Limón described his bill, which was introduced on May 11, as the starting point for a conversation about protecting borrowers. She noted that homelessness, already a major problem in California, could climb much higher due to the pandemic.
“Without an invoice as a vehicle, we have no conversation,” said Limón.
Lenders have raised a host of objections. The bill would create duplicative requirements that would sometimes contradict federal guidelines, the American Bankers Association and other business groups wrote in a recent letter.
“These conflicts have the potential to significantly disrupt access to credit for California borrowers, as well as the securitization market that provides the liquidity needed for the mortgage market,” the groups said.
Non-bank auto lenders have expressed similar concerns, noting that loan officers’ obligations to make payments to investors do not end when consumers adopt a forbearance plan.
“There is no tolerance for lenders when customers stop paying for nine, 12 or 15 months,” said Scott Govenar, a lobbyist representing the California Financial Services Association, a trade group whose members include auto lenders. , during the hearing on Tuesday.
Limon’s bill would also force payday lenders in California to make substantial concessions to their clients during the current crisis. For example, the fees on a $ 300 loan would be temporarily reduced from $ 45 to $ 15. A payday loan business group has said its member companies will stop offering loans in California if the bill goes into effect.
Democrats hold a qualified majority in the California legislature, but lawmakers’ suspicious reception to Limón’s measure suggests she will need substantial revisions to become law.
In a separate hearing in the California Senate on Tuesday, lawmakers voted 7-0 to advance a more modest bill that also addresses the economic consequences of the COVID-19 crisis.
Senate legislation, which has not attracted opposition from industry, would expand the foreclosure protections that currently cover homeowners to also apply to some homeowners on a temporary basis.
“We’re just trying to keep people housed and owners from losing their property,” Bill’s sponsor, Democratic Senator Steven Bradford, said in an interview.
The debate over borrower protections during the pandemic is expected to intensify in other states and Washington in the coming weeks.
Lawmakers in 13 states, including New York and New Jersey, have introduced coronavirus bills that address forbearance and other loan protections, according to the National Conference of State Legislatures.
On Capitol Hill, the COVID-19 response bill recently passed by the Democratic-controlled House of Representatives, which is expected to serve as a starting point for negotiations with the Republican-majority Senate, would extend existing mortgage protections beyond homeowners receiving federal support. mortgages.
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