SACRAMENTO, Calif. (Legal Newsline)--A Democratic candidate for California attorney general is shaking up state law that relates to home loans.

State Assemblyman Ted Lieu, D-Torrance, is the author of comprehensive legislation aimed at protecting both struggling homebuyers from unscrupulous lenders as well protecting the larger lending market from future strain.

His Assembly Bill 260, which takes effect Jan. 1, bars lenders from steering mortgage borrowers into higher-priced loans that are more risky than lower-interest, fixed-rate loans for which the borrower had actually qualified.

The new law also, among other provisions, bans negative amortization loans where the loan gets larger the longer the borrower holds the loan and puts caps on prepayment penalties.

The law will also prohibit lenders and mortgage brokers from making false or misleading statements about the terms of a subprime loan.

Lieu said the legislation will help "bring trust and security" back to the state's mortgage market and protect borrowers from the abusive lending practices he said he blames for contributing the national home foreclosure crisis.

"Look out Wall Street, California is no longer the Wild West," Lieu said. "Although it took over two years, I am pleased to have been able to overcome the powerful interests blocking reform so that future generations won't ever experience this type of crisis. This is a big win for consumers and for the future of California's housing market."

State Assemblyman Pedro Nava of Santa Barbara, a second Democratic AG candidate, for his part sought this year to ban to collection of up-front fees for loan modification services.

Under Assembly Bill 764, which was vetoed in October, violations will be subject to a fine of $20,000 for an individual and $60,000 for a corporation and up to one year in county jail.

The vetoed Homeowner Fraud Prevention Act was approved by California's Democratic-led Legislature with wide bipartisan support. Nava is chairman of the Assembly Banking and Finance Committee.

In his veto message, Republican Gov. Arnold Schwarzenegger said he was opposed to a provision in Nava's bill that would have only allowed fees to be collected if a loan modification was successful.

"This could adversely affect legitimate businesses that provide loan modification services," Schwarzenegger said.

The governor did sign this year Senate Bill 94, which bans the collection of up-front fees for loan modification services. The bill was authored by state Sen. Ron Calderon, D-Monterey Park.

In addition to Lieu and Nava, other Democrats running for state attorney general include Assembly Majority Leader Alberto Torrico of Newark, San Francisco District Attorney Kamala Harris, former Los Angeles City Attorney Rocky Delgadillo and Chris Kelly, chief privacy officer for the Web site Facebook.

Republican Sen. Tom Harman of Huntington Beach is the only person seeking the GOP nomination to succeed Attorney General Jerry Brown, a Democrat widely expected to run for governor.

From Legal Newsline: Reach staff reporter Chris Rizo at chrisrizo@legalnewsline.com.