The Senate Chamber erupted in applause when lawmakers approved the legislation that sets new regulations for the mortgage industry.
The Homeowner Bill of Rights bars foreclosures while loan modifications are pending and provides homeowners a single point of contact with lenders.
It also allows homeowners to sue banks, which Republican Assemblymember Diane Harkey says will delay foreclosures and harm the real estate market.
HARKEY: "I can't believe we're doing this, this is ridiculous, right now we have 352 days for foreclosure, that is plenty of time to get your house in order."
But Democratic Assemblymember Mike Feuer called it the most important piece of legislation lawmakers have ever acted on.
FEUER: "This legislation then can be the catalyst not only for a recovery of California's real estate market but a catalyst across the nation as borrowers everywhere will demand the same protections given to California borrowers."
Governor Jerry Brown is expected to sign the homeowner protection package.
It would take effect in January.