By Jill Replogle

Civil Justice Research & Education Project

SACRAMENTO–Financial institutions, including several banks that received taxpayer bailouts, spent almost $4.01 million on lobbying in Sacramento in the first three quarters of the year as they sought to blunt legislation to rein them in.

That represents a slight dip from the $4.5 million they spent on lobbying here during the same periods in 2007 and 2008. But the spending shows that two and a half years after the mortgage industry began its plunge, banks and their trade groups are willing and able to assert their sway within the Capitol.

The industry successfully blunted and blocked several bills intended to provide consumer protections and halt abuses that led to the worst recession since the Great Depression.

“The consumer is totally outgunned,” Rep. Jackie Speier (D-Hillsborough), who was chair of the Senate Banking Committee before being elected to Congress in 2008, said in a recent interview.

Altogether, the financial services industry including banks, insurance companies, firms that offer high-interest loans and others spent $14.8 million on lobbying in the first nine month of 2009.

With several banks and subprime lenders defunct or swallowed into other institutions, spending by the financial services and insurance sectors declined but only by $750,000 from the prior year. The 2009 spending was equal to 2006 levels, and well above sums spent at the start of the decade.

Banks, insurance companies and others in the financial services sector continue to spend heavily on lobbying.

In the session that drew to a close in September, consumer groups engaged in major battles over legislation with banks including Bank of America and trade groups including ones representing banks and mortgage brokers.

Banks that received billions in federal tax-funded bail-outs spent hundreds of thousands on lobbying:

• Bank of America’s lobbying tab of $291,345 for the first nine months of the year exceeded the $219,227 it spent on lobbying in 2008, and $137,312 it spent in 2007.
• Wells Fargo’s $108,000 lobbying cost was only a slight dip from the $109,651 it spent in the same period last year.
• Citigroup’s $272,652 was slightly above the $267,530 it spent in the first nine months of 2008.

They fought over bills to restrict risky lending practices, halt foreclosure scams, increase consumer protections and give individuals the right to sue brokers, lenders and mortgage servicers for breaking the law.

One bill sought to prohibit banks and other recipients of taxpayer bailout money from using it for holiday parties, bonuses and lobbying. It failed.

Several measures endorsed by Gov. Arnold Schwarzenegger, by far the state’s biggest recipient of banking industry campaign donations, were designed to stem the tide of foreclosures. Critics say his plan isn’t working.

Banking lobbyists spent busy summer days shuttling between committee hearings and the offices of legislators and regulators. Their general message has changed only slightly since 2007 when the housing bubble popped. It had been: Don’t mess with a good thing. Now, the message is: Don’t make things worse.

“The amazing thing is that through good times and bad, [the legislators] are still willing to listen to them,” said Paul Leonard, California director for the Center for Responsible Lending.

Financial industry targets lending restrictions

One of the financial industry’s targets was Assembly Bill 260 by Assemblyman Ted Lieu (D- Torrance). Lieu’s bill was designed to ban some of the riskiest lending practices that contributed to the subprime mortgage fiasco. Schwarzenegger signed it into law last month.

The bill seeks to prohibit lenders and brokers who offer subprime loans from “steering” clients toward higher cost loans. It also bans negative amortization loans, in which the borrower’s payment is less than the accrued interest. In these loans, the difference is added to the loan, causing the balance to increase.

Many of these loans are targeted at lower-income borrowers or those deemed less credit-worthy by traditional measures.

The measure limits prepayment penalties for most subprime loans and restricts mortgage broker compensation, including so-called “yield spread premiums.” Yield spread premiums are rewards paid by lenders to brokers for negotiating a loan with an interest rate above the par rate.

While supported by consumer groups and unions, the bill faced opposition from the mortgage and real estate industries, whose lobbyists argued that increased regulation will make it even harder for struggling home owners to get loans.

“I think it’s worthwhile to ask whether we need to layer more regulations onto residential loans,” said Mike Belote, a lobbyist for the California Mortgage Association.

The mortgage and real estate industries also opposed language in the bill requiring “that the mortgage broker place the economic interest of the borrower ahead of his or her own economic interest.”

“We understand fiduciary duty and we understand getting the borrower the best loan we can,” said Belote, [but] “I think it subjects brokers to more litigation which they don’t need.”

The industry won a concession in July, when Lieu stripped out the private right to action, which would have allowed individuals to sue brokers or lenders for violating the law. Lieu said he did so to avoid veto by Schwarzenegger. The governor vetoed similar legislation in 2008.

“I would love to have a private right to action but I need the governor’s signature,” Lieu said.

Some consumer advocates pushing for tougher restrictions were lukewarm toward the bill, saying it doesn’t go far enough.

“What more do we need to happen in the world to get people to realize we need stronger protection in place?” asked Kevin Stein, associate director of the California Reinvestment Coalition.

Consumers win one, banks weren’t opposed

Another contentious issue on the California legislature’s banking agenda involved mortgage loan modification.

Two bills, one by Sen. Ronald Calderon (D-Montebello) and another by Assemblyman Pedro Nava (D-Santa Barbara), sought to make real estate agents and others, including attorneys, who assist in modifying mortgage loans, wait to get paid until after they’ve done the work. As more and more Californians face foreclosure on their homes, a booming industry has developed to help people change the terms of their mortgage loans.

Many financial services firms engaged in the business are the same ones that helped buyers get into the bad loans in the first place. While much of the industry is legitimate, a growing force, including consumer interest groups, Attorney General Jerry Brown and the State Bar say scams are rampant.

Representatives of the real estate and mortgage business agree, but say licensed agents who follow the rules should be allowed to charge upfront as usual.

“The bad guys are breaking the law now; they don’t need a new law to break,” Stan Wieg, staff vice president of the California Association of Realtors, said at a Senate Committee on Banking, Finance and Insurance hearing this summer.

For most of the year, the California Association of Realtors opposed both bills, saying advance fee contracts approved by the Department of Real Estate should be able to stand. One of the Capitol’s most potent lobby forces, the Realtors have spent $3.3 million on lobbying since 2007, and more than $2.2 million on campaign donations.

Consumer advocates, who contend that advance fees should not be permitted, had urged Schwarzenegger to sign Nava’s measure, AB 764.

“It’s ridiculous that you actually need this industry at all,” Leonard said. “You shouldn’t need to have to pay someone to refinance a loan that should be in the mortgage servicers’ interest anyway.”

By the time lawmakers cast their final votes of the year, Realtors were supporting Calderon’s SB 94. A late amendment had softened the measure.

Schwarzenegger vetoed Nava’s bill, and signed Calderon’s, saying:

Although I support the prohibition of individuals charging advance fees for mortgage loan modifications, I do not agree with the provision of this [Nava] bill that will only allow fees to be collected if a modification is successful. This could adversely affect legitimate businesses that provide loan modification services. As such, I am signing SB 94 that accomplishes this prohibition against advance fees without unnecessarily harming legitimate companies.

State regulators continue to field complaints from consumers who say they’ve been ripped off by scam artists posing as loan modification specialists. The California Department of Real Estate had about 800 investigations into potential scams pending as of the summer, compared to fewer than 10 in June 2008, said Tom Pool, the Department’s public information officer.

Brown had received 2,500 complaints as of October, up from 200 in 2008. The attorney general has filed suits against 21 individuals and 14 companies for loan modification fraud in July. Brown and some others say they believe Calderon’s measure will curb abuses.

Effort to curb lenders’ new gambit stumbles

A third thorny issue involves reverse mortgages–what many consider the new hot way to make a buck in the mortgage industry.

Officially called Home Equity Conversion Mortgages, reverse mortgages are growing fast as baby boomers age, and lenders and brokers seek out new, lucrative products in the post-subprime world.

Two bills, AB 329 by Assemblyman Mike Feuer (D-Los Angeles) and SB 660 by Sen. Lois Wolk (D-Davis), were designed to protect senior citizens, the recipients of these loans.

Lobbyists representing companies that offer reverse mortgages sought to water down both the bills. By the end of the session, lawmakers approved Feuer’s bill, which requires additional disclosures to borrowers, and Schwarzenegger signed it into law.

Feuer’s bill will require lenders to hand prospective borrowers a written warning about the implications of obtaining a reverse mortgage. Once it takes effect on Jan. 1, the bill also will require lenders to give prospective borrowers a checklist of issues to be discussed with a reverse mortgage counselor. The checklist will have to be signed by the counselor and prospective borrower and provided to the lender before a loan application could be approved.

AB 329 will prohibit lenders from compensating counseling agencies for their work, and prohibit reverse mortgage lenders from certain types of “cross-selling,” for example, referring clients to insurance agents to purchase an annuity or other financial or insurance product.

Lenders blocked Wolk’s measure.

Banks had opposed Wolk’s inclusion of language stating that the lender or broker “owes the prospective borrower a duty of honesty, good faith, and fair dealing,” saying it would leave them vulnerable to lawsuits.

“The banking lobbyists are frantic,” Prescott Cole of California Advocates for Nursing Home Reform said during the summer as he lobbied for Wolk’s bill. Wolk’s bill narrowly escaped death in July at a hearing before the Assembly Committee on Banking and Finance, then stalled the following month in the Senate.

Dustin Hobbs, communications director for the California Mortgage Bankers Association, said the language in Wolk’s bill was too vague and could lead to costly court battles over what constitutes fiduciary duty for lenders.

“We encourage our members to deal honestly with our customers, but it’s not something you want established in legislation in a vague fashion,” Hobbs said.

California Advocates for Nursing Home Reform, the AARP, Aging Services of California, California Alliance for Retired Americans and Consumer Attorneys of California backed the measure.

Wolk questioned why the mortgage industry shouldn’t be subject to the same the fiduciary duties that are already codified in other parts of the law, including the section of California’s insurance code that addresses business with seniors.

“It applies to the insurance industry. Why shouldn’t it apply to the banks?” said Wolk.

Reverse mortgages can be useful for some older people. They provide a way for homeowners aged 62 and older to turn equity in their homes into hard cash for immediate needs. The loans come due when the homeowner dies or sells the house.

These loans have grown rapidly in recent years, sparking concern over the industry’s regulation. The U.S. Government Accountability Office issued a report noting concerns about “potentially misleading” marketing claims and “inappropriate cross-selling,” and warned that HUD counselors may not be complying with federal reverse mortgage counseling requirements. Here is a Washington Post report on the GAO’s study.

The report said more than 2,700 lenders make reverse mortgage loans, and most entered the business since 2008. The number of reverse mortgages negotiated has grown from 157 loans in fiscal year 1990 to more than 112,000 in fiscal year 2008.

Reverse mortgages sometimes are offered to elderly people as a way to pay for annuities, which the AARP says can be “very risky, and generally not wise.” Deferred annuities, which delay payments for years and include high penalties for getting out early, are particularly egregious, said Cole.

“Insurance companies are talking seniors into buying these deferred annuities when they’re 80-years old,” Cole said. Such investments perhaps are appropriate for younger adults, but likely would never pay off during elderly people’s lifetimes.

The boom in reverse mortgages has come with a slew of loan bailouts. The Federal Housing Association insures reverse mortgages, paying lenders back when they fail to recover an investment. Borrowers are charged an insurance premium that goes into the FHA fund to pay off lenders.

The FHA fund took on $381.3 million in reverse mortgages in 2008, according to an investigation by Consumer Reports. (link) With demand growing, the FHA has requested an additional $800 million in taxpayer money for 2010 to cover expected losses.

“The lender will not lose a nickel on this,” Cole said.

Consumers could gain some victories

Measures to stem foreclosures fared somewhat better in the legislative jungle. Schwarzenegger signed the Foreclosure Prevention Act into law in February.

The law is designed to give troubled borrowers additional time to work out a loan modification before the locksmith arrives. The measure exempts lenders and mortgage servicers who implement a “comprehensive loan modification program.”

Hundreds of exemptions have been granted while only a handful have been denied. Housing advocates say the plan has been ineffective in stopping foreclosures.

Foreclosures were up 22% during the first quarter of 2009 compared to last year. The percentage of loan modifications has gone up since last year, but has dropped off since January 2009.

Pool, the Department of Real Estate’s public information officer, said California’s feeble housing environment leaves panicked homeowners vulnerable to individuals and firms ready to make a buck off the weak.

“That’s really a target-rich environment for con artists,” he said.

Still, Pool said putting restraints on potentially-risky loan products doesn’t make for a safer lending environment.

“The industry is much smarter than the rest of us,” he said, “so they always come up with new products that skirt regulations.”

The bill that perhaps struck most bluntly at the financial industry’s influence in this era of the banking bailout is Assemblyman Nava’s AB 1075.

The bill sought to prohibit state banks and credit unions that are receiving taxpayer assistance funds from using the money for holiday parties, executive bonuses or lobbying.

That bill never made it to the Assembly floor for a vote. It stalled in an Assembly committee. There, it likely will remain there.

(Replogle is attending UC Berkeley School of Communications, where she is seeking her masters degree in journalism. She was an intern at Civil Justice Research & Education Project. For more details on the banking lobby, please see the first part of this series. jillrep@gmail.com)

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Civil Justice Research & Education Project

SACRAMENTO–A senior executive for mortgage lending giant, New Century Financial Corp., calmly assured California legislators that risks associated with subprime loans were entirely manageable. Lawmakers should be exceedingly careful about requiring any changes, or else Californians would be frozen out of the housing market, he warned.

The date was Jan. 31, 2007.

The Senate banking committee had convened in a first floor hearing room in the Capitol hoping to sort out the reasons behind nagging reports from their districts about the rise in foreclosures.

“These products perform well in the marketplace, and are adequately managed by the primary and secondary mortgage markets,” Marc Lowenthal, senior vice president of New Century, told committee members.

In his testimony, Lowenthal extolled non-traditional mortgage products, saying they had made home ownership affordable and helped borrowers improve their credit ratings. Importantly, he said, this new style of lending was allowing working Californians to “build financial safety nets” for themselves.

The New Century executive warned that expanding on federal guidelines to limit a widely-used class of subprime loans in California would depress the housing market, “cutting off home ownership to deserving families and significantly affecting the nation’s economic health.”

Within one month, New Century’s stock price had plummeted.

On April 2, 2007, it filed for bankruptcy.

New Century once had 7,200 employees and made more than $75 billion in loans in a three-year period, making it the third largest subprime lender in the nation. The Irvine-based firm had employed 3,000 mortgage professionals in California at the time of the hearing. More than 30% of its loans went to Californians.

Now, New Century stands as a symbol of mismanagement and avarice in an industry that accounted for 20% of the nation’s home loans in 2006, the year before the real estate bubble burst and set off the biggest blow to the nation’s economic health since the Great Depression.

California’s golden rule: those with the gold rule

The Obama Administration, Congress and federal regulators are struggling to mop up the mess and prevent further economic decline. To be sure, the failings of Washington’s lawmakers and regulators opened the way for the debacle. But California state authorities share a measure of blame. Many decisions made and not made in this state’s Capitol helped worsen the crisis.

“It was the state-regulated entities that caused most of the problem,” said Paul Leonard, California director of the Center for Responsible Lending, a group that has long advocated for an overhaul of lending practices. At the height of the industry’s boom, more than 70% of subprime loans were made through brokers, most of who are overseen by state regulators.

Nine of the top ten subprime lenders nationally were based in California, though the impact of their business extended far beyond this state’s borders. The loans they sold were repackaged, collateralized, bought by investors, and now are all-too-well known as toxic assets, requiring $700 billion in taxpayer bail-outs.

There is no better barometer of the power of state government than the amount that moneyed interests spend to try to influence it.

Banks and other corporations most heavily involved in the subprime mortgage industry spent $59 million in campaign contributions and lobbying in Sacramento during this decade, fighting to keep state regulators off their backs and blocking or weakening proposals that sought to curb risky lending, according to an examination of records and interviews with some of the key players.

Bail-out or not, lobbying never stops

The lobbying continues.

Recipients of federal bail-outs and loan guarantees including Bank of America, American International Group and others spent more than $2.6 million on lobbying in the first three quarters of the year in California, and handed out $975,000 in campaign donations. Spending on lobbying dipped somewhat from $3.2 million during the first three quarters of 2008, and $2.8 million in 2007. But some political players spent more.

One particularly generous campaign donor was General Electric, the New York-based conglomerate that had a subprime lending subsidiary earlier in the decade. General Electric benefited from a $74 billion debt guarantee granted by Uncle Sam late last year.

In the first six months of this year, GE donated $785,000 to California campaigns, nearly matching the sums the corporation had spent on California state campaigns in the first eight years of the decade combined.

The bulk of its campaign money–$605,000– went to Gov. Arnold Schwarzenegger’s campaign committees. Another $165,000 went to the Chamber of Commerce and California Republican Party, which helped fund Schwarzenegger-backed ballot measures earlier this year.

GE spent an additional $397,000 to lobby California state officials in the first three quarters of the year. That is more than GE spent on lobbying here than it did for the entire year of 2008.

In Sacramento, GE focused much of its lobby effort on blocking state tax hikes and win new breaks, including one that in time could provide GE’s entertainment subsidiary, NBC-Universal, with film industry tax credits created by Schwarzenegger and legislators earlier this year. GE did not respond to requests for comment. The Schwarzenegger administration defends its stands on taxes, and says campaign money has nothing to do with decisions.

“The economic stimulus measures the Governor pushed for in the budget are saving jobs in a broad range of California industries,” Schwarzenegger spokesman Aaron McLear said. “The Governor always makes decisions based on what’s best for California.”

California’s crisis is not over

California has been at the epicenter of the mortgage crisis that has shaken the nation’s economy. One in 144 homes in California are in foreclosure, ranking this state third worst after Nevada and Florida among all 50 states. It may get worse. By the end of July, nearly one in 10 California homes had been in default. Industry experts predicted that roughly 60% of those homes could end up in foreclosure.

“California is obviously ground zero,” said John Dunbar, lead author of a report on the subprime industry by the Center for Public Integrity, a Washington D.C.-based watchdog group that has reported on the subprime industry. “I don’t think a lot of this would have happened if it weren’t for whatever’s in the water there.”

A look back at legislative history shows how the mortgage and banking industries helped beat back efforts to curb their highly lucrative, and increasingly popular, game of risky lending.

The subprime industry began to blossom in the mid-1990s, spurred on by a strong real estate market, low interest rates and federal encouragement to spread the “American Dream” of home-ownership to many who had traditionally been unable to get a loan. Subprime loans were originally designed for people with less-than-stellar credit ratings or a source of income that was difficult to document, such as self-employment.

Wall Street banks discovered a gold mine by buying up the loans, packaging them and selling them off as securities. Bankers spurred subprime lenders, many of them owned or funded by the big banks, to slacken underwriting standards and offer the loans to ever more borrowers.

Subprime lending increased 10-fold during the second half of the 1990s. By 2006, one in every five mortgage loans originated was subprime and one in five was originated in California. Some consumer protection groups, like the Center for Responsible Lending, warned about the boom in a largely unregulated sector, and sought to convince legislators at the state and national level to rein in certain practices before it was too late.

Though some California legislators paid attention, their efforts to curb risky lending were largely muffled by industry lobbying.

“The industry basically had a stranglehold on the legislature,” said Norma Garcia, a senior attorney for Consumers Union who has lobbied for lending reform since the 1990s.

Dustin Hobbs, communications director for the California Mortgage Bankers Association, scoffed at the notion that proposed legislation in recent years could have prevented the mortgage crisis.

Fraud was rampant, Hobbs said, and the culprits were various, including consumers who took out loans they couldn’t afford, brokers pushing bad products on buyers, and consumer groups pushing lenders and Washington to make more loans available to more people.

“Everybody should have done something differently,” said Hobbs, who represents Bank of America and Wells Fargo as well as small and mid-sized mortgage lenders.

Subprime players spent strategically

Since the start of the decade, the nation’s largest subprime mortgage lenders delivered no less than $21.5 million in campaign donations to California state politicians and causes, and spent another $37 million to lobby state regulators, the governor’s office, and legislators, a review of Secretary of State disclosures show.

The top five recipients of those campaign donations are telling. The California Republican Party and the GOP’s county committees received the most, at $3.4 million. The GOP was the No. 1 recipient even though California in recent years has leaned heavily Democratic. One reason to give to the GOP is that Schwarzenegger is a Republican. Schwarzenegger has made heavy use of the costly initiative process, and the Republican Party has helped pay for those measures.

The second largest recipient was California’s governor himself and his ballot measure committees, at $2.9 million.

Schwarzenegger is by far the largest recipient of the subprime industry’s largesse of any state officeholder or candidate in the nation. That conclusion is based on data collected by California Secretary of State and other state elections officials, and compiled by ProtectConsumerJustice.org and the National Institute for Money in State Politics, a nonpartisan organization based in Helena, Mont.

The California Democratic Party was the third largest recipient, at $2.05 million.

The fourth biggest recipient was Sacramento’s largest business lobby group—the California Chamber of Commerce, at $1.26 million. Fifth was Proposition 64, a 2004 initiative approved by voters that was touted by business and tort “reform” advocates, and intended to restrict consumers’ right to bring class action lawsuits. Lenders, many of which became targets of class action lawsuits, gave $675,000 to the initiative, and another $253,000 to Proposition 64′s main proponent, Civil Justice Association of California, during this decade.

Just as telling are the bills intended to restrict lending practices that the industry fought to water down or kill as the subprime loan crisis loomed.

A tough bill became softer

In 2001, then Assemblywoman Carole Migden (D-San Francisco) introduced the Covered Loan Law, AB 489. The measure sought to define “predatory lending practices” in the subprime market and ban brokers from offering predatory loans to low-income Californians.

At least, that’s what the bill proposed to do before going through an eight-month process of gutting, amendments and revisions. Garcia of Consumers Union said the final product, while a start, did little to restrict risky lending.

At the time, dozens of states and cities across the country were debating ways to curb predatory lending practices. Consumer advocacy groups said these practices were artificially inflating the cost of subprime home loans and increasing the risk of foreclosure. These practices included steering, charging hefty pre-payment penalties and encouraging loan refinance despite little or no benefit to the borrower, all of which are still legal for most loans in California.

Representatives of the booming mortgage industry reacted swiftly. Major subprime lenders met earlier that year to map out strategies for combating the wave of predatory lending laws, including dispatching lobbyists across the country, according to an April 4, 2001 article in the New York Times.

At the national level, mortgage industry campaign contributions to federal campaigns hit a 10-year high during the 2002 election cycle, according to the nonpartisan Center for Responsive Politics in Washington. Spending on federal campaigns by the industry totaled $12.6 million in 2001 and 2002.

Back in California, Household International, then one of the nation’s biggest subprime lenders, lobbied hard against Migden’s bill.

In a Sept. 10, 2001 letter to state assembly members, Household wrote that the bill would result in higher credit costs to customers and likely reduce the amount of credit available to those “with the greatest need.”

The company insisted in its letter that existing laws were “comprehensive and certainly prohibit fraudulent and deceptive practices” in the mortgage industry.

As Migden’s bill progressed between 2000 and 2002, Household International spent $663,000 to lobby California state officials, and $270,000 on campaign donations.

In 2002, Household International paid $484 million to settle a nationwide predatory lending suit, the largest of its kind in the nation’s history. The firm was bought by HSBC in 2003.

The California Mortgage Association also lobbied against Migden’s bill, warning the bill would “create redlining through legislative action” in a letter to Assembly members. “Poor people will not get loans,” said the letter, contained in the archived bill file. “People will lose their homes.”

Gov. Gray Davis signed Migden’s bill in October 2001. It did provide protection for borrowers of certain high-risk loans against excessive points and fees. The law also restricted prepayment penalties and the practice of “steering” borrowers into higher-cost loans.

“It was a fledgling but strong beginning step,” said Migden. “I’m proud that we had the foresight to pierce a powerful industry.”

Nevertheless, most subprime loans weren’t covered by the law, and lenders and brokers simply stopped making loans that would have been covered. Despite dire warnings from the industry, subprime loans continued to flow.

Another tough bill never had a chance

Four years after Davis signed Migden’s bill, then-State Senator Jackie Speier (D-Hillsborough) introduced a bill, SB 790 of 2005, which would have expanded the definition of covered loans and established additional protections for borrowers.

Consumer groups supported the bill. Lobbyists for the mortgage industry said it would chase lenders out of the subprime market.

Industry lobbying was so effective that the bill “went down in flames,” as Garcia put it, in the very committee Speier chaired, Senate Banking, Finance and Insurance.

Speier, now a member of Congress, got only one other vote on the 11-member committee. Five Democrats abstained.

“There is this unwritten rule that the chair always gets her bill out of committee,” said Speier.

In the eight years she chaired the committee, “this is the only bill I couldn’t get out,” she said.

Investors and brokers making big bucks in the booming real estate market weren’t risking any intrusion on their territory, especially by state regulators.

“That was the wild, wild West,” Speier said. “Even the modest protections were too much.”

Speier pushed her bill at a time when the subprime industry was throwing around its weight—in the form of campaign donations and lobbying expenditures—like never before. In 2004 and 2005, the subprime industry campaign spending on California campaigns hit its height—more than $9 million.

Subprime had a formidable lobby corps

Opponents of Speier’s bill included the California Mortgage Bankers Association, California Mortgage Association, California Bankers Association and individual mortgage firms.

One of these firms was Option One Mortgage, whose former CEO and other executives formed New Century.

They also included Calabasas-based Countrywide Financial Corp., then the largest subprime lender, and since absorbed by Bank of America.

Countrywide Financial Corp. spent $1.76 million on lobbying during the decade and shelled out another $2.1 million in campaign donations.

Ameriquest Mortgage Co., the nation’s second largest subprime lender, was the biggest political player.

From its base in Orange County, Ameriquest became responsible for $80.6 billion in loans, according to the study by the Center for Public Integrity.

“Ameriquest was a very generous donor,” said Speier, “both to Democrats and to Republicans.”

Ameriquest and its principals doled out $11.5 million in campaign donations to California politicians and causes between 2000 and its collapse in 2006.

In California, Ameriquest gave $3.2 million to the California Republican Party between 2000 and 2006, and $1.7 million to Schwarzenegger and his ballot measure committees, plus $1.3 million to the Democratic Party and various Democratic committees.

Ameriquest was a heavy donor to business lobby groups, too, giving $900,000 to California Chamber of Commerce campaign committees, another $164,000 a political action controlled by the Civil Justice Assn. of California, plus $105,000 to Proposition 64, the 2004 initiative to curb consumer lawsuits.

Ameriquest had an interest in curbing litigation. It faced a barrage of suits brought by state attorneys general and private attorneys over its predatory lending practices. It ultimately settled those cases for $325 million in 2006.

Ameriquest gained notoriety for its political activities. News accounts detailed how the company feted aides to Schwarzenegger, state legislators of both parties, and other top officials. They flew lawmakers and their spouses to Hawaii and Aspen, and provided hard-to-get tickets to Super Bowls and Rolling Stones concerts in 2005 in Anaheim and San Francisco. On one trip to Honolulu in February 2005, Ameriquest spent $4,129 on a meal for Democratic legislators, and another $170 on cookies.

In addition to its campaign donations, Ameriquest spent $1.8 million to lobby California state officials. That was more than three times the $540,000 Ameriquest spent on lobbying federal officials and lawmakers in Washington, D.C., during this decade, federal lobby reports show.

Its California campaign donations roughly equaled the $12 million that Ameriquest and its founder, the late billionaire Roland Arnall and his wife, Dawn Arnall, spent on federal campaigns.

Much of Arnall’s money was spent to help President Bush’s reelection in 2004. Arnall also spent $1 million to help pay Bush at his second inaugural. Bush, in turn, rewarded Arnall by appointing him ambassador to the Netherlands. Arnall died in March 2008.

Like the feds, state regulators fell short

One reason Ameriquest, New Century and many other subprime lenders focused their political efforts in California was that state regulated them.  Ameriquest was not a bank—it accepted no deposits—so federal regulators had no direct oversight role. But of course Ameriquest could not have flourished without Wall Street. Banks bought Ameriquest’s loans and bundled them into what have become all-too-well known as toxic assets.

By 2006, federal regulators had begun to smell the dangers of the lending frenzy and took some action to curb what they considered risky lending among banking entities under their control.

In September of that year, the federal government issued voluntary “guidance” that states could consider imposing on purveyors of nontraditional mortgage products, including “interest-only” mortgages and “payment option” adjustable-rate mortgages.

But the guidance only applied to federally-chartered banking institutions, not state-chartered lending firms, like Countrywide, Ameriquest or New Century.

Many states quickly applied the federal guidance to state-chartered firms. Other states enacted even stricter guidelines or laws.

On Jan. 31, 2007, the Senate Banking, Finance and Insurance Committee convened to discuss how California should react to the federal guidance.

That was the hearing in which Lowenthal, speaking for New Century, assured legislators that all was well. The problem was not risky loans, but rather California’s high real estate prices, Lowenthal said.

“We caution California policymakers to take a careful and deliberate approach to the guidance as they determine which elements make sense for California,” Lowenthal told the committee. “Unlike other states, the guidance if adopted too strictly in California, could further exacerbate the state’s already serious affordability crisis.”

Leonard, of Center for Responsible Lending, offered a counterpoint at the hearing.

He predicted one in five subprime loans originated in the state in 2006 would end in foreclosure.

Then Sen. Lou Correa (D-Santa Ana), now an assembly member, seemed skeptical. He mused that it would “be interesting to see if the doomsday projections play out.”

That prediction, as we now know, turned out to be and then some.

(Replogle is a student at UC Berkeley’s Graduate School of Journalism and was a summer intern for Civil Justice Research & Education Project; jillrep@gmail.com)

Next: What the banking industry sought and got in 2009

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