California has emerged as an early battleground in a burgeoning 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 7-3 to advance legislation that would temporarily halt foreclosures and auto repossessions, expand consumers’ eligibility for loan forbearance and limit lenders’ options once payment deferral periods end.
The measure, which borrows from proposals that have been championed by Democrats in Washington, is drawing opposition from banks, credit unions and other lenders. It figures to 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 constrict financial institutions’ decision-making during the pandemic. Many banks and credit unions are voluntarily offering forbearance to borrowers who have suffered financially, and it is often in the lenders’ own interest to do so. Payment deferrals can enable borrowers to get back on their feet, staving off losses for the lenders.
But supporters of the California legislation say that many borrowers are being left out. More than 30% of residential mortgages in the nation’s largest state are not federally backed, which means they do not qualify for up to 360 days of forbearance under the federal relief law, according to a legislative staff analysis of the California bill.
The legislation by Democratic Assemblymember Monique Limón would extend protections to homeowners with privately backed mortgages. “What I want to ensure is that there is some standardization for Californians,” Limón said Tuesday during a hearing on the bill. “Right now, it is by luck.”
The bill would also guarantee relief to struggling auto loan borrowers. Borrowers who state that they are experiencing hardship during the pandemic would get 90 days of forbearance, which could be extended. After the forbearance period, servicers of both auto loans and mortgages would be required to work with borrowers to establish payment plans that avoid lump-sum repayments.
At Tuesday’s hearing, all three votes against the bill were by Republicans. But Democrats who voted to advance the measure also raised objections to various aspects of the bill. Limón vowed to make changes in response to the feedback she has been receiving.
Democratic Assemblymember Jesse Gabriel expressed concern about the potential for borrowers who still have the ability to make their loan payments to take advantage of forbearance.
“The burden should be on consumers to go and demonstrate that they have suffered financial hardship if we’re going to then place a hardship on our credit unions or on other lenders,” Gabriel said.
Limón described her bill, which was introduced on May 11, as the starting point in a conversation about borrower protections. She noted that homelessness, already a major problem in California, could climb much higher as a result of the pandemic.
“Without a bill as a vehicle, we don’t have a conversation,” Limón said.
Lenders have raised a host of objections. The bill would create duplicative requirements that would sometimes contradict federal directives, the American Bankers Association and other trade 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 needed liquidity for the mortgage market,” the groups stated.
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Nonbank auto lenders have voiced similar concerns, noting that the obligations of loan servicers to make payments to investors do not end when consumers go into a forbearance plan.
“There is no forbearance for lenders when customers stop paying for nine, 12 or 15 months,” Scott Govenar, a lobbyist representing the California Financial Services Association, a trade group whose members include auto lenders, said at Tuesday’s hearing.
Limon’s bill would also force payday lenders in California to make substantial concessions to their customers during the present crisis. For example, the fee on a $300 loan would be temporarily reduced from $45 to $15. A payday lending trade group has said that its member companies would stop offering loans in California if the bill took effect.
Democrats hold a supermajority in California’s Legislature, but lawmakers’ wary reception to Limón’s measure suggests that it will need substantial revisions to become law.
At a separate hearing in the California Senate on Tuesday, legislators voted 7-0 to advance a more modest bill that also addresses the economic consequences of the COVID-19 crisis.
The Senate legislation, which did not draw industry opposition, would extend foreclosure protections that currently cover owner-occupants so that they also apply to certain landlords on a temporary basis.
“We’re just trying to keep folks housed and landlords from losing their property,” the bill’s sponsor, Democratic Sen. Steven Bradford, said in an interview.
The debate over borrower protections during the pandemic is likely to heat up in other states and in Washington in the coming weeks.
Lawmakers in 13 states, including New York and New Jersey, have introduced coronavirus-related bills that deal with 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 the starting point for negotiations with the Republican-majority Senate, would extend existing mortgage protections beyond those homeowners with federally backed mortgages.
