I’m all for government oversight of consumer protection, but I wish they’d put more thought into the impact of their regulations before they passed them.  Take California’s SB94 covering loan modification and its effect on California homeowners.  It’s one of those things that, as comedian Harry Anderson used to say, “sounded like a good idea at the time”.  But as with many laws, it has unintended consequences.

Loan modification is a big deal right now, because foreclosure notices are seeping up everywhere you look, from people who’ve been out of work for a long time and can no longer make huge mortgage payments. to people who probably shouldn’t have gotten loans in the first place (no money down, no income documentation).  In theory, banks are willing to do loan modifications because even though the homeowner gets a lower interest rate and the loan is worth less, they have one less foreclosed property to deal with.

Here in California, purportedly as a consumer-protection measure, the state Senate passed SB94.  But it was not thought out well, for several reasons.  One is that the consumer must go through an existing lender, which must be registered with the California Department of Real Estate.  The lender cannot charge any fees until the deal goes through.

The results are more than disappointing.  If someone wanting a loan modification goes through their lender, they have to get in line and deal with the general incompetence of an overwhelmed and understaffed mortgage division.  It’s not surprising, then, that if you research customer happiness with their loan modification, 95% of the results relate negative experiences.  Even the successes are more like horror stories.  I heard of one consumer whose loan modification process took 18 months. According to one Web site, Bank of America has approved just 7% of the loan modification requests they’ve gotten to date.  It’s no wonder that so many people are looking for reputable companies to relieve them of the hassle and frustration of having to deal with their lender.

Now, though, if California consumers want to go somewhere else, well, it’s become much more difficult.  Because of the no-fee clause, companies in California have much less of an incentive to provide services to California residents (companies located outside of California are not bound by SB 94).

Meanwhile, California-based companies and private investors now have much less incentive to participate in the process.  Private investors with funding could be the release valve to offload the pressure from the banking system.  People would pay for this service if they could get a solution without getting cheated, but now they’re forced to work with out-of-state companies if they want to get help.

The result is that California consumers are protected all right — but they’re protected from getting their mortgages under control.