Senate Bans ‘No Doc’ Loans, Kickbacks in Mortgage Practices

Mortgage lending practicesThe Senate has approved new rules overhauling some mortgage lending practices which contributed to the housing market meltdown, including banning lender kickbacks to brokers for originating high-cost loans and requiring income documentation from applicants.
The amendment to broader financial system reform still under consideration was approved in a 63-36 vote. It would effectively end the once popular ‘no doc” or liar loans that were prevalent during the housing bubble build-up.
Lender incentives, or kickbacks, known as “yield spread premiums,” encouraged loan brokers to steer consumers into riskier, high-interest mortgages even if customers qualified for lower-cost loans.
Liar loans allowed applicants to qualify for loans they could not possibly repay if they would have been required to provide proof of income or other assets.
The amendment sets minimum underwriting standards related to loan-to-value and the ability to repay on the stated rate of the loan, including the first five years of a variable rate loan.
The amendment was sponsored by Sen. Amy Klobuchar, D-Minnesota, and Sen. Jeff Merkley, D-Oregon.
“Complex and deceitful lending practices were at the heart of the financial crisis,” said Klobuchar in a statement.  “As we work to reform Wall Street, we must establish safeguards to protect consumers from predatory loan practices. Helping everyday Americans obtain sound loans while avoiding unnecessary risk is essential to restoring our economy.”
The Senate also voted to keep a measure in the Wall Street financial reform bill – opposed by the mortgage industry – that would require lenders to keep a 5 percent stake in mortgages bundled into securities and sold on the secondary market.
In a victory for the Federal Reserve, the Senate also passed in a 90-9 vote an amendment – introduced by Senators Klobuchar and Kay Bailey Hutchison, R-Texas – that maintains the Fed’s supervisory role over hundreds of this country’s small and medium-sized community banks.
The measure reverses the initial proposal by Senate Banking Chairman Christopher Dodd, the chief author of the broader reform bill, whose intent was to concentrate the Fed’s authority solely over major banking institutions.
“If you take the Federal Reserve supervisory authority away from all those community banks around the country, and regional banks no longer have input into what is going on in smaller communities, we will have too big to fail in reality, and we will also have a monetary policy that is going to cater to the big financial institutions…” Hutchison said.

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