Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Senate votes to ban liar loans

By Tami Luhby, senior writer


NEW YORK (CNNMoney.com) -- The Senate voted Wednesday to ban controversial "liar loans," which helped bring down the housing market.

The legislation, part of the broader financial regulatory reform bill working its way through Congress, would require lenders to fully document a borrower's income before originating a mortgage. It would also mandate that lenders verify a borrower's ability to repay the loan.

This would effectively end the origination of no-doc or stated-income mortgages, which many call "liar loans" because borrowers did not have to prove their income. Housing experts point to these mortgages as one catalyst for the housing collapse.

The bill would also prohibit lenders from giving brokers incentives for steering customers to loans with higher interest rates or prepayment penalties.

"Deceptive mortgage practices like hidden steering payments directly led to the Wall Street meltdown and resulted in millions of families losing their homes," said Sen. Jeff Merkley, D-Ore., co-author of the bill.

The provisions build on Federal Reserve regulations that required lenders to verify the income and assets of subprime borrowers. Those rules, which went into effect in October, did not ban incentive payments, called yield-spread premiums.

"This should make the mortgage market a safer place for consumers," said Julia Gordon, senior policy council for the Center for Responsible Lending. To top of page

Search for Jobs

Index Last Change % Change
Dow 18,244.43 100.98 0.56%
Nasdaq 5,285.63 16.48 0.31%
S&P 500 2,160.53 9.40 0.44%
Treasuries 1.56 0.01 0.51%
Data as of 9:42am ET
Company Price Change % Change
Intel Corp 37.32 -0.12 -0.32%
Regions Financial Co... 9.67 -0.16 -1.63%
Kinder Morgan Inc 22.76 0.02 0.09%
Southwestern Energy ... 13.20 -0.22 -1.64%
Xerox Corp 10.18 0.10 0.99%
Data as of Sep 29
Sponsors

Sections

Lawmakers grill Wells Fargo CEO John Stumpf about CNNMoney report on the bank retaliating against whistleblowers who flagged fake accounts. More

California workers who don't already have access to a retirement plan at work will soon be enrolled in a new state-run IRA savings plan. More