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.

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