Uncharacteristically middle-of-the-road for regulation-heavy California, the state's new anti-predatory lending law is not as weak as predatory lending rules in other states, but it's also not as tough as some, including a local ordinance within the Golden State's own borders.

California is a popular hunting ground for predatory lenders and most experts agree the law will help curb loans that can cost consumers their homes, even if the law also reveals how tough it can be to pass stronger anti-predatory rules.

Predatory loans are a malignant outgrowth of the otherwise useful subprime residential mortgage sector. Subprime loans are generally more expensive than prime loans, but they are intended for borrowers who pose a greater risk to lenders, typically because of the lack of credit or previous credit problems.

Without the subprime segment, some borrowers would be locked out of the mortgage market and the American Dream. Unfortunately, in numerous documented cases, subprime loans become predatory with exorbitantly high costs, penalties and other financially abusive features often directed at specific groups, including minorities, older, low-income borrowers and others who can least afford the added cost.

Labeled "financial apartheid" by Maude Hurd, president of the Association of Community Organizations for Reform Now (ACORN), predatory loans have been particularly prevalent in California.

Thirty-six percent of the subprime loans surveyed in California were deemed predatory, according to "Stolen Wealth: Inequities in California's Subprime Mortgage Market" produced by the California Reinvestment Committee last year. Also, "Separate and Unequal: Predatory Lending in America" by the confrontational non-profit Association of Community Organizations for Reform Now found some of the nation's highest levels of minorities targeted by subprime loans in major California cities including San Francisco and San Jose as well as Fresno.

California's new law, AB 489, was effective July 1, 2002. Consumer protection from anti-predatory loans is triggered when loans with an original principal balance does not exceed $250,000 and the annual percentage rate (APR) exceeds by eight percentage points the yield on Treasury securities with comparable periods of maturity; or the total points and fees payable by the consumer at or before closing will exceed six percent of the total loan amount.

When it comes to loans that trigger consumer protections, California law covers more loans than the federal Home Ownership Equity Protection Act of 1994 (HOEPA).

California's high-housing costs, however, cuts into the number of loans that can be covered by the new law. The state's median price of single-family homes was more than $320,000 in May, according to the California Association of Realtors and in areas such as Silicon Valley with a record median price of $578,000 in May, the law is even less effective.

"I think there are laws that do more in North Carolina and in Georgia and some do less in Maryland, Pennsylvania, Florida and Ohio which have laws that basically restate existing federal protection," said David Swanson, an ACORN spokesman.

A key provision in California's law does not prohibit local jurisdictions from enacting stiffer penalties or preempt existing stiffer laws in the state.

Oakland, CA previously passed one of the toughest predatory lending laws in the nation. A mortgage industry trade suit to block that law failed.

"California's law is a significant first step, but yes, it's not pretending to solve all the problems. One of the other big advantages is that it prohibits financing single-premium credit insurance," said Chris Saffert, ACORN's legislative director.

California's law prohibits the credit insurance financing on all loans not just those protected by the predatory loan protection triggers. Credit insurance often forces borrowers to pay interest on already high insurance premiums, something the Consumer Federation of America has called "the worst insurance rip-off" in the nation.

Otherwise, on loans covered by the triggers, California's law now:

Published: July 10, 2002

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.